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.