Comment: The Bundesbank appears to accept reality

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The Independent Online
Hans Tietmeyer, president of the Bundesbank, returns from holiday on Monday and if he has been reading his newspapers, he will already know that he is expected to cut German interest rates soon afterwards. Double- guessing the Bundesbank has traditionally been a mug's game. Many expected the key rate to be cut at the last council meeting on 25 July, but in the end it was left unchanged.

This time, however, there seems to be a widespread consensus that Germany must and will act. Even Otmar Issing, the Bundesbank's hyper-conservative chief economist, appears to have spun full circle.

Earlier this week he seemed to be against any further easing of policy. But now he is quoted in the International Herald Tribune as worrying about the strength of the mark and the relative weakness of the German economy. In other words, he seems to have accepted the case for a cut. This despite the fact that money supply, still the touchstone of Germany monetary policy, is growing at well above its official target range of 4 to 7 per cent.

In its old, purist days the Bundesbank would never have cut interest rates in these circumstances. It seems to be politics, and the screams of pain emanating from the mark's French fiancee as much as anything else, that are determining policy.

So if the Bundesbank does cut rates, what does it really mean? To the still numerous siren voices of Germany's inflation hawks, it is a sign that the Bundesbank is going soft, that the power of the anti-inflation faith grows weak and that past disciplines are falling into disrepair as Europe hurtles down the path to monetary union. But to most of us it is merely an acceptance of reality. Germany needs to cut interest rates both for its own sake and for everybody else's. The strength of the mark is crippling German industry, and through its link to the franc, the French economy too. That in turn helps stifle growth elsewhere.

The rumour mill has it that President Chirac is again toying with the possibility of cutting loose from the mark, so dire has the French economic position become. You only need to visit France's half deserted holiday resorts to know the seriousness of the situation. This might seem an inappropriate indicator of the health of a nation, but for France in August, the traditional holiday month, it is a reliable one.

Even the Germans are staying away this year and as for the French, where once they would go to the restaurant they'll now have a sandwich instead. Sacre bleu! Unless Germany acts to ease both its own plight and that of France, the holy grail of monetary union is in danger of evaporating before its eyes.

But if the Bundesbank does cut rates, salvaging monetary union and placating France will be only part of the cause. It will also be because the Bundesbank is indeed becoming soft in its old age. From the outside at least, it looks as if the Bundesbank is moving towards the "touchy feely, trend is my friend" way of judging the inflationary outlook so beloved of our own Chancellor Kenneth Clarke.

Perhaps in future we can expect a less rigid, even, dare we say, less Germanic approach to the cause of low inflation. Dear, oh dear. What's the world coming to?

Don't throw out the baby with the bathwater

The Securities and Investments Board rather states the obvious when it spells out in its consultation document on the London Metal Exchange a number of basic principles that markets need to follow if they are to maintain their integrity.

Of course they need to be transparent, of course all users need to be treated equally, of course the system that determines prices needs to be reliable and fair, and of course there need to be adequate safeguards to protect the market against manipulation and abuse.

The more difficult question, which the document fails to answer, is what is so wrong with the LME that it could have allowed all these principles to be breached by Yasuo Hamanaka of Sumitomo, and before him by other rogue traders on the Wild West frontiers of copper trading.

Nor is there any explanation comprehensible to you and me of what actually happened during the Sumitomo affair. In asking for suggested reforms, the SIB is thus rather putting the cart before the horse, attempting to find avenues of reform before it identifies the real causes and methods of abuse.

But to be fair on the regulator, this document is only the first stage of the process. Its purpose is to inform the regulator about how the market works and whether the way it conducts itself is appropriate to present circumstances.

The SIB is right to tread carefully, for London is the world's largest metal trading market and its position is jealously coveted by other financial centres around the world. It risks throwing the baby out with the bath water if it is too gung-ho with its reforms. The ever so gentle, just tell us how it all works approach adopted in yesterday's consultation paper, is probably about right. Reform comes later.

Lloyd's deal that may not add up

The advent of the Lloyd's of London investment trusts three or four years ago always was a bit of an oddball thing and their highly specialised nature has duly been reflected in their performance. So far it has been generally poor.

Now the sleepy little world that these trusts have been allowed to inhabit is getting something of a rude awakening. Matthew Harding's new insurance investment vehicle, Benfield and Rea, marched in yesterday to break up the cosy merger planned between two of the middling players, HCG and CLM.

That comfortable marriage was meant to give cost savings and dilute risks across a wider number of syndicates. The combination would have created the second-biggest "spread" investor at Lloyd's, with pounds 320m underwriting capacity.

The aim was reasonable enough, but the economies of scale may always have been illusory. The costs of taking on expensive merchant bankers to stitch together a deal and buying out the contracts of managing agents could easily have outweighed many of the benefits.

Launched three years ago amid much talk of achieving spectacular long- term returns, none of the Lloyd's investment trusts have performed well. Most of them have been a big disappointment. However, none of them promised early returns and it could be that Mr Harding has his timing about right.

Mr Harding, the man credited with rescuing Chelsea football club, has strong credentials with his successful Harding reinsurance group. With analysts suggesting that Lloyd's trust shares are around 10 per cent undervalued against net assets, there is plainly upside to be had. The revitalisation of Lloyd's of London is in for nothing.