G7 hopeful for German rate cut

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HOPES are rising among the Group of Seven finance ministers that the Bundesbank is on the verge of deciding a further cut in key interest rates, opening the way for lower rates in Europe, including Britain.

G7 finance ministers and central bankers meet in London today to review the uncertain prospects for economic recovery in the industrial world. Despite deepening concern that Continental Europe is slipping decisively into recession, the US and Britain have blocked a French initiative to invite a representative of the European Commission, which is pressing for a more active G7 approach to the international downturn.

An early reduction in German rates may offer the quickest relief for the European recession. In contrast to earlier G7 meetings, there are no indications that the Bundesbank will come under overt pressure to bring forward a reduction in rates. Instead, there are worries that if pressures are brought to bear on the German central bank, it will delay a reduction in order to safeguard its political independence.

Officials admit that the relentless rise of unemployment in much of the industrial world is uppermost in their minds. But the Seven have no plans to co-ordinate their economic policies; each country will instead apply the policies appropriate to its own circumstances.

However, Norman Lamont, the Chancellor, is unlikely to escape advice to tighten fiscal policy in next month's Budget. The international credibility of UK economic policies is at a low ebb and a number of governments believe Britain's public sector borrowing requirement is too high.

Nevertheless, with the US economy emerging convincingly from recession and hopes that lower German rates may soon emerge, finance ministers are likely to devote most attention to Japan, the second largest G7 economy.

With a current account surplus likely to swell a further dollars 13bn to dollars 132bn this year, and the economy sinking into outright recession, Tokyo is coming under growing pressure to boost domestic demand with large increases in public spending.

Japanese leaders are currently drawing up plans for higher spending on public works and tax incentives for housing and capital investment. But other ministers are likely to be sceptical in view of the failure of a pounds 62.8bn public spending package announced last summer to clear the Japanese parliament.

G7 officials believe a Japanese recovery is crucial for a worldwide upturn. Despite a relatively closed economy, Japan imported dollars 235bn of goods last year and is also one of the largest exporters of capital.

Although officials are anxious to portray the talks as a 'get acquainted' session, they are considered important in view of the virtual collapse of international economic co-operation last year. Lloyd Bentsen, the new US Treasury Secretary, requested the meeting in a bid to restore G7 credibility.