Growth in German money supply stubbornly high: Record profits, but chairman worried over future

BUNDESBANK caution over further cuts in key interest rates strengthened yesterday after May figures for German money supply growth came well above the central bank's target ceiling for 1994, writes John Eisenhammer.

The annualised rate of M3 growth fell to 13.7 per cent from 15.4 per cent in April, disguising the persistence of structural problems which have been troubling the Bundesbank's key inflation- risk indicator.

Monetary capital formation, whereby funds are investing in longer-term assets not included in the M3 definition, stagnated at the April level. The last two key interest rate cuts, in April and May, were made largely with a view to encouraging investors to shift away from short-term assets, which are part of M3.

Bank lending to firms and individuals, a significant cause of monetary expansion, continued to grow in May at an annualised pace of 9.9 per cent, a little above the 9.5 per cent rise in April.

Analysts still expect M3 growth to slow over the course of the year, but there is concern that the current turmoil on international bond markets will complicate the Bundesbank's efforts to switch investor preferences into long-term paper.