The prospect of an increase in interest rates next week moved closer yesterday after the European Central Bank (ECB) released figures showing a sharp rise in the money supply within the euro zone. M3 growth accelerated to 6.1 per cent in September from 5.7 per cent in the previous month.
The rise, which was greater than most analysts expected, indicates an annual M3 growth rate of 5.9 per cent - well above the ECB target of 4.5 per cent.
The euro rose briefly following the news, which the markets interpreted as a powerful incentive for the ECB's governing council to raise interest rates when it meets in Frankfurt next Thursday.
The ECB is obliged to take money supply as well as price rises into account when it assesses the danger of inflation and its president, Mr Wim Duisenberg, has expressed concern about recent money supply figures.
"The ECB has no choice but to tighten the screw on inflation rates. That would be a good thing too. The market would then quieten down at last," said one Frankfurt dealer yesterday.
Expectations of a rise in interest rates next week have heightened since Mr Duisenberg suggested last month that the era of low rates may be drawing to a close.
Many analysts regard next week's meeting as the ECB's final opportunity to raise rates before the spring. December is regarded as an unsuitable month to raise rates on account of the confusion that may arise at the end of the year due to Y2K, and an increase in January or February could fuel big wage claims in Germany's annual pay round.
"We have had a truly accommodating monetary policy stance over more than a year. We are assessing whether this period of an accommodating monetary stance has had enough time. We are turning our minds now to the future and to the fact that we have to adapt and have a monetary policy stance that will be conducive to sustained, non-inflationary growth," Mr Duisenberg said last month.
Although last month's decision to leave rates unchanged was taken without a vote, Mr Duisenberg acknowledged that the discussion within the governing council had been "intensive", indicating that some central bankers wanted to increase rates immediately.
Amid fresh signs of an economic upturn in Germany and after a succession of warnings about inflation from European central bankers, Mr Ulrich Beckmann of Deutsche Bank Research in Frankfurt believes the money supply figures will confirm the central bankers in their determination to act now.
"The numbers will make it easier for the ECB to raise rates at its next meeting. We now expect a compromise hike of 25 basis points on November 4th," he said.
