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The Eurosystem Secures Price Stability<br />
M3 Growth in the Euro Area<br />
<strong>Annual</strong> change in %<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
1999<br />
M3<br />
2000 2001 2002 2003 <strong>2004</strong> 2005<br />
Three-month moving average<br />
Source: ECB.<br />
Oil prices<br />
fuel inflation<br />
M3 growth sags<br />
at the beginning<br />
of <strong>2004</strong>, quickens<br />
from mid-<strong>2004</strong><br />
In the second half of <strong>2004</strong>, inflation<br />
came in at over 2% every month.<br />
The contribution of the component<br />
energy to inflation widened from<br />
0.5 percentage point at mid-year to<br />
0.8 percentage point in October<br />
<strong>2004</strong>. However, no price pressures<br />
emanated from developments within<br />
the euro area itself, as wage increases<br />
were still moderate and as the oil<br />
price rise had not produced secondround<br />
effects; moreover, given dampened<br />
growth, this pattern was expected<br />
to persist. Against this background,<br />
the EurosystemÕs inflation<br />
projections of December <strong>2004</strong> put<br />
Euro Area Credit Growth<br />
<strong>Annual</strong> change in %<br />
10.5<br />
9.5<br />
8.5<br />
7.5<br />
6.5<br />
5.5<br />
4.5<br />
3.5<br />
1999 2000 2001 2002 2003 <strong>2004</strong> 2005<br />
Total lending<br />
Loans to the private sector<br />
Source: ECB.<br />
inflation at between 1.5% and 2.5%<br />
for 2005 and at 1.0% to 2.2% for<br />
2006.<br />
TheexpansionofM3slowedfrom<br />
6.5% at the beginning of <strong>2004</strong> to<br />
4.9% in May <strong>2004</strong>, reflecting above<br />
all the normalization of investorsÕ<br />
marked preference for liquid assets<br />
as a result of their cautiousness from<br />
2001 through 2003. Economic agents<br />
regained market confidence and began<br />
to reinvest in longer-term and<br />
riskier assets. On the back of low interest<br />
rates, M3 growth reaccelerated<br />
from 5.3% in June <strong>2004</strong> to 6.4% in<br />
December <strong>2004</strong>. The low interest<br />
rate level also boosted credit demand,<br />
in particular for mortgage<br />
loans, which is indicative of the real<br />
estate price boom in some euro area<br />
countries. In view of these developments,<br />
the Governing Council of<br />
the ECB cautioned that the stock of<br />
excess liquidity and strong credit<br />
growth represented not only a risk<br />
to price stability, but could also entail<br />
anexcessiveriseinassetprices.<br />
20 ×<br />
<strong>Annual</strong> <strong>Report</strong> <strong>2004</strong>