BUNDESBANK RETAINS MONEY SUPPLY POLICY
Bundesbank council member Lothar
Mueller said the bank has not given up its money supply policy
and that restraining money supply growth does not always mean
pushing up interest rates.
    Mueller said in an article for the Boersen Zeitung
financial daily that a monetary policy which took into account
exchange rate expectations and capital flows could not be
confused with an exchange rate oriented policy.
    The article followed international press speculation that
the Bundesbank had abandoned money supply targetting in favour
of an exchange rate policy.
    Mueller, a member of the Bundesbank council in his position
as president of the regional state central bank in Bavaria,
noted that the Bundesbank's decision in January to cut leading
interest rates amid continuing strong monetary growth had led
some people to think it was dropping monetary targetting.
    "Simply to ignore the external economic context would be
risky and dangerous for monetary policy," he explained.
    Mueller said the cuts in official interest rates had put an
end to interest rate speculation. The Bundesbank could now
assume that upward pressure on the mark would ease and currency
inflows slow down.
    Lower money market rates, achieved by widening short and
long term interest rate differentials, also encouraged
investors to re-invest funds parked in liquid accounts, Mueller
said.
    The measures therefore aimed clearly at bringing monetary
growth back onto the desired path, he said.
    "Finally, of course, and there is no need to keep this
quiet, the cut in interest rates was also in line with the
changed economic situation of the last few months," he added.
    "All in all, the Bundesbank in no way abandoned its money
supply policy with the January discount rate cut, despite
suppositions to the contrary," Mueller said.
    "Keeping money supply developments in check is not always
synonymous with raising interest rates, especially when
excessive liquidity due to inflows from abroad, rather than
growth in bank credits, is the cause of rising monetary
holdings of non-banks," Mueller said.
    Now that West Germany no longer ran large external deficits
other concepts were needed for monetary policy.
    Mueller said it would be both difficult and dangerous for
monetary policy to pursue a specific mark/dollar exchange rate.
    In any case, the exchange rate partly depends on U.S.
Currency and budgetary policy and the U.S. Economy, he said.
    But an exchange rate orientation would also mean the end of
a strict stability policy because both interest rates and
liquidity would be affected by required currency intervention
and could no longer be steered autonomously by the Bundesbank.
    Even interest rates are not in the centre of the
Bundesbank's considerations, but reflect competition and other
market conditions, Mueller said.
    A cut in bank liquidity will not directly influence central
bank money stock, the Bundesbank's main money supply indicator.
    This does not reflect banking liquidity, but the liquidity
of industry and households which cannot be directly reached
with the Bundesbank's instruments, Mueller said.
    The less dependent non-banks are on bank credits, the
harder it is to steer money supply. This has increasingly been
the case recently, because non-banks have received considerable
sums from current account surpluses and capital imports.
    "If the Bundesbank had tried to brake the money supply rise
with higher interest rates, as would have been appropriate if
credit was growing excessively, it would not only have missed
its target but probably even set off further inflows," he said.
    Mueller said growth in money supply was still too high.
    In the last three months money stock grew at an annual rate
of seven pct, down from 10 pct in the previous quarter.
    The growth curve has therefore come closer to the three to
six pct 1987 target corridor for central bank money stock
growth, pointing to the success of the current policy, he said.
    But high monetary stocks can be a warning sign and there
should be no change in priorities. "Monetary policy must be
first and foremost stability policy and successful stability
policy is money supply policy -- nothing else," he said.
 REUTER
