GERMANY'S central bank has said that rampant money supply growth slowed only slightly in May, sparking new doubts as to whether the bank could justify a further cut in short term interest rates.
The Bundesbank said German M3 money supply grew at an annualised rate of 10.5 percent in May after an 11.2 percent rise in April. The rise is calculated by comparing annualised M3 growth with the average level of the last quarter of 1995.
The figure was in line with most analysts' forecasts but fell short of markets' expectations for a lower figure, which had been intensified by comments from Bundesbank officials that seemed to indicate they expected a much softer figure for May. German bonds and shares dropped to losses after the data.
"Bundesbank officials really whetted the market's appetite for a better figure," said Mr Thomas Mayer at Goldman Sachs, referring in particular to a comment by Bundesbank president Dr Hans Tietmeyer predicting that M3 growth would slow.
Financial markets had been working on the basis that a drop to single digit M3 growth last month would have provided the Bundesbank with the ammunition it needed to embark on a long awaited cut in its securities repurchase rate, or repo. M3 is the central bank's main policy indicator.
Figures for M3 expansion on a six month annualised basis showed M3 growth actually gaining pace to an 11 per cent rate from 10.4 per cent in the six months to April.
Mr Armin Kayser, economist at SBC Warburg in Frankfurt, said of the M3 data "These numbers do not give the Bundesbank the justification to ease the repo rates at this time . . . the likelihood or a repo-rate reduction has really declined."
Analysts also noted that monetary capital formation the shift of funds into longer forms of investment not included in M3 remained weak, while lending to the private sector had slowed only modestly. Both of these factors push up M3 growth.
The Bundesbank last cut its pleading interest rates in midApril taking the discount rate, the floor for German rates, back down for a historic low off 2.50 per cent and the ceiling Lombard rate to 4.50 per cent.
It left the 3.30 per cent repo rate unchanged in that package of moves but stressed that it planned to lower the repo further when conditions were right. Bundesbank officials have continued to reinforce this intention in comments since then.
Some analysts argued that this stated commitment meant the Bundesbank could still find a way to lower the repo, in spite of the untoward performance of its leading policy indicator.
