Prospects increased on Wednesday for further rate rises by the European Central Bank as data showed that the eurozone money supply is growing at the fastest rate since the start of monetary union.
The eurozone's M3 money supply, monitored by the ECB as a guiding indicator of inflation, grew by 10.0 percent in February, the fastest growth rate since the introduction of the euro, the bank calculated in a statement.
The figure was higher than expected: analysts' consensus forecasts had been pencilling in M3 growth of 9.9 percent in February.
The ECB closely monitors developments in the money supply when deciding the appropriate level of interest rates because it sees a link between the level of liquidity in the economy and future inflation.
The guardian of the euro calculates that the money supply needs to expand by an annual 4.5 percent to serve as a basis for non-inflationary economic growth.
But M3 money supply, which covers cash, overnight deposits, other short-term deposits, repurchase agreements, shares and units in money market funds and debt securities with a maturity of up to two years, has been growing much faster than that for around six years.
Because the monthly figures are subject to volatility, the ECB also calculates a three-month moving average for M3 growth.
And that picked up last month, accelerating to 9.9 percent in the period from December to February from 9.7 percent in the period from November to January.
With current economic indicators pointing up and inflationary dangers also high as a result of high energy prices, the ECB pays a great deal of attention to monetary developments and has used them as justification for its decision to raise its key interest rates seven times since December 2005.
The ECB last raised its key rates by 0.25 percentage points to 3.75 percent this month and is expected to tighten monetary conditions again in the coming months.
"The monetary analysis confirms the prevailing upside risks to price stability at medium to longer horizons," the ECB wrote in its March monthly bulletin published recently.
"Monetary developments therefore continue to require very careful monitoring, particularly against the background of a solid expansion in economic activity and continued strong property market developments in many parts of the euro area."
In its statement on Tuesday, the ECB calculated that loans to the private sector, another key yardstick of future inflation, grew by 10.3 percent in February, slightly slower than the 10.6 percent recorded in January.
And the annual rate of growth of lending for house purchase was steady at 9.5 percent in February, the ECB data showed.
ECB watchers were convinced that the latest data would add to the case for further monetary tightening.
"February's acceleration in euro zone M3 money supply growth ... will hit a raw nerve for the ECB. It adds to ECB concerns that monetary expansion and liquidity growth is running far too strong in the euro zone, raising the risk of spillover into higher inflation," said Bear Stearns analyst, David Brown.
Zaki Kada of Thomson Financial agreed.
"Credit growth and abundance of liquidity will continue to be a factor in arguing for higher rates by the ECB and this cements the need to raise the refi rate by another 25 basis points by mid-year," the analyst said.
"The ECB hawks can easily use this data as an argument for hiking rates further," said UBS economist Sunil Kapadia.
Commerzbank economist Michael Schubert argued that the M3 data were distorted, but that the guardian of the euro was likely to tighten monetary conditions further nevertheless.
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