9 May 2001, 17:09 The European Central Bank plans to correct
--ECB To Rebase M3 Data Series To Strip Out Distortions From Holdings of
Marketable Short-Term Instruments By Non-Eurozone Residents
--March M3 Annual Growth Rate Would Have Been About Same As February's
4.7% If Adjusted For Calendar Effects
--Still Too Early To Say If Decline in Market Volatility In April Will
Have A Dampening Effect on M3 Growth, As Compared to March
By Christian Distasio
FRANKFURT (MktNews) - The European Central Bank plans to correct
its M3 data series to strip out the distorting effect caused by
non-eurozone residents' purchases of marketable short-term instruments,
an adjustment that will have a "substantial" impact on M3 growth rates,
Market News International understands.
The issue of marketable instruments, which the ECB has referred to
several times recently, has become more and more acute, as the resulting
distortion of eurozone monetary developments has increased over time,
particularly during the last few months, Market News has learned.
The ECB has said that non-resident holdings of short-term
securities -- which have no implications for eurozone liquidity and,
thus, inflation -- have distorted M3 growth upward. Those holdings are
still included in the M3 aggregate because the ECB has not yet been able
to reliably filter them out.
The ECB has made progress on quantifying this effect on M3 growth
and will provide further information on the quality of available money
supply data and the extent to which M3 growth has been distorted by
foreigners' purchases of marketable instruments.
At the same time, the ECB is working to adjust the money supply
data to take account of calendar effects, which also caused an
appreciable upside distortion of the annual M3 growth rate in March. If
the series had been adjusted for this effect, then year-on-year M3
growth that month would have been more or less unchanged from the 4.7%
rate seen in February and thus lower than the 5.0% figure reported by
the ECB on April 30, Market News has been informed.
The ECB is not yet certain as to how base effects will impact on M3
growth in the coming months, though some analysts have argued that these
will become less favorable in the period ahead, Market News understands.
ECB officials also feel it is premature to say that the experience
of the first two years of monetary union has revealed a seasonal pattern
that may be repeated this year, whereby rather strong M3 growth in the
first quarter is followed by relatively weak growth in the second
quarter. The fact that M3 growth was strong in March 2001 was chiefly
due to the marketable instruments issue, they argue.
Similarly, the ECB is not yet in a position to say whether an
unwinding in April of the severe market volatility seen in March --
which led investors to boost portfolio liquidity and thus shift out of
instruments contained in M3 -- might lead to a dampening of M3 growth in
April, data for which will be released late this month.
In any case, the distortions reflected in the March M3 data support
the ECB in its view that a single month's data not be given too much
weight. As a result, the ECB is not reading the March figures as a
change in the underlying trend of a deceleration in M3 growth over the
past year that has seen the annual rate steadily approach the central
bank's 4.5% reference value for M3 growth, Market News understands.
A rebasing of M3, which could result in a strong decline in annual
money supply growth rates, would have no direct bearing on the ECB's
reference value, which is reviewed at the end of each year. This is
because the reference value is derived from existing assumptions about
potential economic growth, the normative inflation rate and monetary
velocity.
However, an M3 rebasing could have implications for the ECB's
assessment of monetary developments and the assumptions on which the ECB
sets interest rates, especially if the result were to put M3 growth
rates well below the reference value.
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