BUNDESBANK CREDIT POLICY CHANGES UNLIKELY
The Bundesbank is unlikely to change
credit policies when its central bank council meets on Thursday
for its last session before the Venice summit, banking
economists and money market dealers said.
    The Bundesbank steered money market rates lower last month
by cutting the rate on its security repurchase pacts, and is
unlikely to cap this move with a cut in leading interest rates
in the near future, they said.
    The council will meet in Saarbruecken, and the meeting will
be followed by a news conference at around 1030 GMT.
    But Bundesbank officials noted that a news conference was
usually called when the council meets outside Frankfurt, and
did not necessarily herald any policy moves.
    Bundesbank Vice-President Helmut Schlesinger said today
there was no reason to cut interest rates because money supply
growth had shown no signs of slowing in May and the dollar was
stable against the mark.
    Schlesinger told Reuters in Tokyo, where the Bundesbank has
opened a representative office, that the West German economy
was now picking up after contracting by a seasonally adjusted
1/2 to one pct in the first quarter.
    Money market dealers said call money was likely to hold in
a 3.50/70 pct range for most of this month, after the
Bundesbank switched last month to tenders by interest rate at a
minimum bid rate of 3.50 pct, allocating funds at 3.55 pct.
    "They have set this signal and indicated they could maybe
lower market rates even further, but not with the discount or
Lombard," Winfried Hutmann, chief economist of Schroeder,
Munchmeyer, Hengst Investment GmbH said.
    Werner Chrobok, managing partner at Bethmann Bank, said
German rates were among the lowest in industrial countries and
around historical lows for West Germany.
    A further cut in rates would have little impact on the
economy as banks are in any case reporting slack credit demand,
with companies swimming in liquidity, Chrobok said.
    The Bundesbank would therefore be reluctant to make a move
on interest rates, when this would be better held in reserve.
"The Bundesbank is frightened of using up its powder," he said.
    A cut in the discount or Lombard rates, to bring them in
line with the new structure of money market rates since last
month, would have little practical significance, dealers said.
    The Bundesbank could therefore act on these if it wanted a
diplomatic gesture before next week's Venice summit.
    But Bundesbank President Karl Otto Poehl has often made it
clear in the past he opposes such gestures as mere "eyewash."
    Economists said it was really up to the Bonn government to
cut taxes, rather than for the Bundesbank to ease monetary
policy, to meet pressure on West Germany at the Venice summit.
    But with Bonn struggling to finance already announced tax
cuts and falling tax revenue widening the federal budget
deficit, it is hard to see how Bonn could cut taxes further.
    "The Bonn government will be in a very weak position in
Venice because they can't risk increasing the deficit further,"
said Schroeder, Muenchmeyer, Hengst's Hutmann.
    Bethmann's Chrobok said if anything is to happen before
Venice, it must be in fiscal rather than monetary policy. "But I
don't expect any convincing measures," he said.
    Money market dealers noted that call money continued to
normalize today, falling to 3.60/70 pct from 3.75/85 yesterday
and as much as five pct on Friday when it was pushed up by
month-end distortions.
    Call money could come under upwards pressure later this
month because of a major round of tax payments by banks on
behalf of customers, starting in the week beginning June 15.
Two public holidays that week could also distort the market.
    Dealers said they expected the Bundesbank to allocate funds
tomorrow in the latest repurchase pact at an unchanged 3.55
pct, after setting an unchanged minimum bid rate of 3.50 pct,
and to fully replace the 5.5 billion marks in an outgoing pact.
    But dealers said it was possible the Bundesbank would
allocate funds at 3.6 pct rather than 3.55. That would not
represent a tightening of policy, however.
    Because the Bundesbank scales down bids which it allocates
at the minimum accepted rate, some banks may try to get a full
allocation by bidding heavily at 3.6 pct, dealers said.
    On another issue, Poehl has said the Bundesbank is likely
to lift restrictions on private use of the European Currency
Unit (ECU) at one of its meetings soon.
    Saarbruecken would be a suitable place for an announcement
on this gesture to European unity, as it is the capital of the
Saarland bordering France, and was twice under French
occupation this century.
    But dealers said an ECU announcement was unlikely to come
this week, as a number of technical and legal matters had still
to be resolved, for instance how German ECU accounts would be
treated for minimum reserve purposes.
 REUTER
