Hans Tietmeyer, the Bundesbank president, used the last central council meeting before the summer recess to defend M3 money supply targeting as the central mechanism for detecting and controlling future inflationary risk. This was despite conceding that the target will be missed for the third year running.
The Bundesbank said the special factors that have seriously bloated M3 growth are finally diminishing - M3 targeting remains the cornerstone of the Bundesbank's anti-inflation policy, and the council decided against tampering with the 4-6 per cent target growth corridor set for this year.
The decision to shave the repo rate from 4.88 to 4.85 per cent and fix it for four weeks was seen as defensive, allowing the improving conditions in the market - sinking inflation, slowing M3 growth and declining bank lending - to work through. 'The Bundesbank is adopting a cautious approach for the moment, letting the markets do the work for it. It can follow later with a key rate cut,' Martin Hufner, chief economist with Vereinsbank, said. The discount and Lombard rates stay at 4.5 and 6 per cent.
Mr Tietmeyer described M3 targeting as part of Germany's stability culture. Blaming the high money supply growth in the first six months of 1994 on temporary distortions, he said that, despite current difficulties, there were no alternatives in sight. The link between money supply growth and inflation remained empirically proven.
He said the bank had been able to tolerate divergences from its M3 target because other indicators, wages and public finance, pointed to improving stability. If recent M3 growth is adjusted for the distortions, it is half its published rate and much closer to target, he said.
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