German interest rate cut forecast


Financial Editor

The chances of a further reduction in German interest rates were improved yesterday with the publication of weaker-than-expected money supply growth figures. The M3 statistics - the key indicator for the Bundesbank's monetary policy - add to an array of data suggesting economic growth is slowing.

July M3 contracted by an annualised 0.4 per cent, compared with a rise of 0.4 per cent in June. Analysts had forecast a rise of 0.7-1.2 per cent in annualised July M3 growth.

"The totally unexpected turnaround in M3 can be seen as encouraging the Bundesbank to lower key rates, perhaps as soon as this Thursday," Peter Mueller, economist at Commerzbank, said.

Several analysts urged caution, however, saying that the overall M3 situation had not changed, and the Bundesbank was likely to await further data before lowering key rates.

The weak figures were caused by strong monetary capital formation, a counterpart of M3, and by slowing bank lending to the private sector. This seems to indicate a further reduction in the pace of economic growth at the beginning of the second half of the year, which in turn suggests that growth is non-inflationary.

Irgeen Rust, economist at West LB, agreed that the unexpected drop increases the likelihood of a Bundesbank rate cut. "We had been expecting the absolute rise in July M3 to be lower than in June, when it was extremely strong, but nothing like this," she said.

The discount rate is currently 4 per cent, and the lowest repo rate 4.45 per cent.