Germany to Slow Money Growth
Bundesbank tries to rein in demand for reconstruction funds by raising the discount rate
THE Bundesbank once again took up the tool of higher interest rates yesterday to try to beat down the German money supply, which is growing at a staggering rate and causing inflation worries.
The central bank's council decided to raise the bank's discount rate from 8 to 8.75 percent. That rate, however, is not as important as the key Lombard rate, which the Bundesbank left untouched at 9.75 percent. Economists do not expect the rise in the discount rate to have a significantly damaging effect Europewide.
The German money supply, whose broad aggregate is called the M3, has ballooned by 40 percent over the last two years. With M3 growing this year at a 9 percent annual rate, the Bundesbank can't meet its 1992 target growth rate of 3.5 to 5.5 percent, economists say.
The biggest force pushing the money supply surge is the enormous demand for funds and credit from east Germany. "There's a huge demand for [money] to spiff up the place," says Commerzbank spokesman Dennis Phillips.
Another factor behind the soaring money supply is that the deutsche mark has become a parallel currency in Eastern Europe. Consultants, taxi drivers, interpreters, hotels, and countless other businesses are demanding payment in marks. Investors add pressure
There's also a technical factor contributing to M3 growth. Short-term interest rates are higher in Germany than long-term interest rates. This is causing investors to shun 10-year bonds, for instance, for short-term investments with a greater return. These short-term investments are counted as part of M3.
But these last two factors, says Paul Horne, international economist with Smith Barney in Paris, probably only account for about 20 percent of the money supply growth. The basic generators behind it are still east Germany's cash and credit needs.
Clearly, the Bundesbank has not been happy with its inability to keep the money supply and its byproduct, inflation, under control. In an interview published yesterday in the German economic weekly Wirtschaftswoche, Otmar Issing, a member of the Bundesbank's decisionmaking council, said monetary growth was "much too high." The Bundesbank has not succeeded in "getting a grip on excessive money growth," he said.
The Bundesbank has been maintaining a policy of high interest rates in its fight against inflation, with its last hike in rates in December, when the Lombard rate rose to 9.75 percent and the discount rate to 8 percent.
This has been most unwelcome among Germany's neighbors, whose monetary policy is highly influenced by what the Bundesbank decides.
Countries such as France and Britain want Germany's interest rates to drop, so that they can finally lower their rates, too, and thus revive their economies. Both the French and British finance ministers asked Germany this week not to take drastic, upward action on interest rates. Adjustment takes time
Although the hope in the international community is that Germany's high interest rates will eventually harness inflation and thus create the conditions for lower interest rates, they are in for a wait, economists say.
In midyear, Commerzbank had expected German interest rates to drop, possibly as early as September. Now, the forecast is for that to happen nearer the end of this year or early 1993. The reason is that inflation remains stubbornly high - at more than 4 percent - and the underlying factors behind it - high wage settlements and the cost of reunification - remain unchanged.