The German central bank's latest signal on rates came in its regular monthly report and appeared to foreshadow a decision by the Bundesbank's policy-making council today to leave key rates unchanged, confounding hopes earlier this week that a fall was imminent.
The Bank of England also declined to signal an immediate cut in UK rates, but failed to dampen expectations of a reduction altogether. Reflecting this, the pound ended more than 2 pfennigs down, at DM2.5010.
Concern that there will be scant relief from recession coincided with a prediction from the Organisation for Economic Co-operation and Development yesterday that unemployment in Europe would mount sharply in 1993. The OECD also admitted that its forecasts of a recovery in 1993 might prove too optimistic.
The Bundesbank said German rates had already fallen significantly since mid-September, a development encouraged by the appreciation of the mark. But because this could eventually boost money supply growth the Bundesbank said it must 'endeavour further to maintain its control over monetary expansion and continue its stability-oriented policy'.
The de facto revaluation of the mark as a result of the European currency crisis in September should make the battle against inflation in Germany somewhat easier. For the moment, however, inflation appears stubbornly resistant, having risen to 3.6 per cent in September. A further boost is due in January when VAT is raised 1 per cent.
The report noted that the conduct of monetary policy had been complicated by the massive intervention in the currency markets last month because of the effect this would have on swelling the German money supply. Suggestions by senior Bundesbank officials that they would not read too much into the September M3 figures, bloated by these special factors, had encouraged speculation that the central bank was paving the way for an easing of policy.
But it appears more likely, given the continuing worries about inflation, as well as growing evidence that the government has little chance of holding to its pledges on limiting spending, that the Bundesbank will wait a while before cutting rates again.
In a preliminary glance at the OECD's twice-yearly Economic Outlook, released yesterday, the OECD said that unemployment in Europe would reach 9.9 per cent this year and increase to 10.4 per cent next year. Last June, the organisation estimated unemployment in Europe would reach 9.3 per cent of the labour force.
The OECD, which is to release its full report in December, also said it was cutting its prediction for economic growth in the industrialised world next year to 2.1 per cent from the 3 per cent expansion predicted in June. It has also shaved its expectations for growth throughout the 24 rich industrial states belonging to the organisation to 1.5 per cent this year. Last June, it predicted a 1.8 per cent growth rate for the industrialised world.
For the US, it forecasts that growth of 1.8 per cent in 1992 will quicken to 2.4 per cent in 1993 - a significant downgrading from the 3.6 per cent growth originally forecast for 1993. It has similarly cut its forecast for Japan, predicting a 1.8 per cent expansion in 1992 followed by one of 2.4 per cent in 1993, down sharply from the 3.1 per cent originally foreseen.
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