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.
  

