NO REASON TO CUT RATES - BUNDESBANK'S SCHLESINGER
Bundesbank vice president Helmut
Schlesinger said he saw no reason to lower interest rates now.
    With money supply growth showing no sign of slowing down in
May and the dollar stable or even rising against the mark,
Schlesinger told Reuters that he was not convinced that a
further cut in interest rates was needed.
    The economy is picking up, after contracting by a
seasonally adjusted 1/2 to one pct in the first quarter from
the fourth, he added. "We may have an increase in gnp starting
in the second quarter," he said in an interview.
    Concerned by the first quarter downturn, the U.S. Has been
pressing West Germany to pump up its economy and boost its
imports, either through fiscal or monetary policy.
    Schlesinger said the contraction in the first quarter was
mainly due to adverse weather conditions, just as occured in
1986. Year-on-year growth was thus about two pct.
    He estimated that economic growth for the year as a whole
would probably be between one and two pct.
   "It is not a question of monetary conditions if domestic
demand does not grow strongly," he said, noting that interest
rates are at historically low levels and funds are ample.
    Schlesinger said he saw no signs that central bank money
stock growth was slowing down from its recent year-on-year pace
of 7-1/2 to eight pct, well above the Bundesbank's three to six
pct target.
    He said the target could still be achieved but much will
depend on the direction of long-term capital flows. Heavy
inflows, particularly in January around the time of the EMS
revaluation, boosted domestic money supply.
    "There is still a certain hope that the net inflow of
foreign money can be diminished or can even be a little bit
reversed," Schlesinger said.
    A major reason for the inflows was the market's conviction
that the mark was headed higher. "As we can see from the market,
expectations for a further revaluation of the deutschemark have
diminished," Schlesinger said.
    The recent widening of interest rate differentials, the
fact that the dollar has fallen sharply in a very short period
and an improvement in real trade balances have all combined
towards stabilizing the dollar, he said.
    Asked if central banks might act to prevent a sharp dollar
rise, as the U.S. Did in March when the dollar rose above 1.87
marks, he said this would depend on the circumstances.
    At midday here, the dollar stood at 1.8340/45 marks.
    "Central banks are always in contact about these
fluctuations but I cannot give any answer how they would react,"
Schelsinger said.
    "One has to look at how it (the market) is moving," he said,
adding, "It is not only our own case, it is also the American
case."
    He said that the West German export industry has been hit
hard by the dollar's sharp fall and would probably like to see
some correction now. "But it wouldn't be good to have short-term
fluctuations," he said. "Let us wait and see."
    "It is mainly the strength of the (dollar) fall in a very
short period which was a little bit of a shock, than the level
(of rates) as such," Schlesinger said.
    The sharp rise of the mark, coupled with weak prices of
such key commodities as oil, had a favourable impact on West
German inflation down year.
    Although there have recently been signs of inflation
picking up, he said that this was due to changes in key
commodity prices. The underlying inflation rate this year would
be unchanged, at about one to 1-1/2 pct, he said.
    Schlesinger said the problem of rapid money supply growth
was longer term, in that the economy was building up the
potential for a possible eventual resurgence of inflation.
    The above-target growth of money supply over the past 16
months had prompted some discussion of the usefulness of
targets themselves, a matter which might be taken up at the
mid-year meeting of the Bundesbank's council, Schlesigner said.
    But he added: "I don't see any great pressure to go away
from it."
 REUTER
