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Record euro M3 growth but mkts to dominate ECB call

FRANKFURT - Euro zone money supply growth jumped to a record high in July, but economists expect recent market turbulence to overshadow this when the European Central Bank decides interest rates next week.

The market upheavals are also likely to dampen money supply growth in the next few months, analysts said, giving welcome relief for the ECB which sees the data as an early warning signal on inflation.

ECB figures on Tuesday showed annual growth in M3 money supply, a broad gauge of how much cash is readily available to spend, picked up to 11.7 percent from 10.9 percent in June.

This was above analysts’ expectations and the highest rate since records began in 1981, but economists said the figures would take a backseat to market turmoil at the ECB’s interest rate meeting on Sept. 6.

‘We are still seeing upside inflation risks but of course at the current juncture this will not have the same influence on the ECB as usual,’ Commerzbank economist Michael Schubert said. ‘Despite these figures the ECB will delay its originally-planned rate hike (in September) and will look at the figures and how the financial markets develop.’

The July figures show money supply development before the market turmoil earlier this month. Economists said the August numbers were likely to show slower growth as concerns about the impact of the US subprime mortgage crisis made banks more cautious about lending.

In July, loans to the private sector edged up to 10.9 percent, driven by strong demand from companies. Corporate borrowing growth picked up to 13.6 percent, from 13.3 percent, offsetting a slowing in household borrowing.

‘If we are correct that the financial market crisis implies that fewer funds will be made available to firms over the coming months, the M3 growth figures should eventually start to slow,’ Calyon currency strategist Stuart Bennett said.

ECB President Jean-Claude Trichet said on Monday that the Governing Council would make a fresh assessment of the economic situation on Sept. 6.

He noted that his last comments on monetary policy, when he used the ‘strong vigilance’ phrase signalling action is likely, came before the market volatility.