PROSPECTS for another cut in German interest rates have dimmed following the release of surprisingly strong growth in money supply for February. This may also delay a further reduction in Irish interest rates, as the Central Bank will not consider reducing its rates further until the Bundesbank moves.

M3, a money supply measure which is a key indicator for Bundesbank interest rate policy, grew at an. annualised rate of 12.6 per cent in February, accelerating from an 8.4 per cent rise in January and further away from the bank's target of 4 to 7 per cent. The rise was driven by strong growth in bank lending, which economists said pointed to a pick up in economic activity.

But analysts said a rate cut was still on the cards given record unemployment at 4.2 million, tame inflation at less than 2 per cent, and declining business confidence.

They now expect the Bundesbank to wait for more data on M3 and the economy before deciding whether to cut rates. That all but rules out a cut at next week's council meeting and any easing is likely to be postponed until the summer, they said.

"M3 growth was surprisingly strong," said Mr Enno Langfeld, head of German economic research at Kielbased institute IW.

"Before the M3 number we thought the discount and Lombard rates would still be lowered by half a point. Now I'd say that after this number the Bundesbank will tend to be hesitant."

Economists at Trinkaus Burkhardt said the data made a rate cut "extremely unlikely" easing was not warranted in a likely pick up in economic activity later this year and a rise in inflation beyond 2 per cent by the autumn.

But analysts also ruled out a rate rise in the foreseeable future.

Rates were last cut by half a point in December when the discount rate (the floor to German money market rates) was reduced to 3 per cent and the Lombard rate (the ceiling) to 5 per cent.

The Bundesbank has for decades defended M3 as a reliable indicator of future inflation trends. It comprises cash in circulation sight deposits, term deposits under tour years and standard savings deposits.

But the bank was keen to point out that the February number was distorted by changes in the tax treatment of mortgage interest payments, and by other factors. It also warned that the annualisation of data exaggerated the effect of swings in money supply at the start of the year.

But economists said a rise in bank lending by 16.7 billion deutschmarks in February after a fall of 300 million deustchmarks in January could not be attributed solely to special factors.

"This could he a sign for the start of an economic recovery in the coming months," Dresdner Bank said in a commentary.

"A further rate cut becomes more unlikely the longer the Bundesbank waits with this step, because there is much to suggest an economic recovery from the second quarter."

Europe's largest economy shrank half a percentage point in the final quarter of 1995 from the previous ,quarter and stayed weak in early 1996 ,as freezing weather caused construction firms to lay off thousands.

Economists said February's M3 growth was all the more surprising because it came despite a slight increase in money shifts from bank accounts - which are included in M3 - to longer term assets such as bonds, which are not counted in M3.

Those shifts, called money capital formation, rose despite heavy bond market turmoil and a sharp fall in bond prices during the month. Without the rise in money capital formalution, M3 growth would have even stronger, economists said.