Spain lifts its key rate

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The Independent Online
The increase by the Bank of Spain yesterday in its key interest rate added to signals of an upward trend across Europe.

Although the devaluers within the old exchange rate mechanism, including Britain, Italy and Spain, are well ahead of countries such as Germany and France in the cycle of market tightening, the evidence is mounting of pressures building across the board.

The recent decision by the French commercial banks to lift short-term lending rates, while partly technical, was seen by analysts as recognition of the tightened conditions.

"In a general climate that is more and more inflationary, or inflation-conscious, it is difficult for countries such as France, where the fundamentals are good, to stay put for too long," said Didier Maillard, chief economist at Paribas.

Three-month money rates have moved up quite significantly in recent months, including those in France and Germany, suggesting the markets are discounting rate increases across the board.

The Bank of Spain said the rate rise from 7.35 per cent to 8 per cent was necessary to catch the inflationary effects of a VAT increase, as well as reacting to the weakened peseta. In Germany, Hans Tietmeyer, president of the Bundesbank, sought to persuade markets that inflation worries were overdone, while sending a stiff warning to the unions that the persistence of this positive situation depended on moderate settlements in the wage round.

He said the central banks council carefully assessed the results of the wage round in view of the effects on the whole economy and price stability.

With unemployment still high, analysts expect the outcome of the negotiations, which begin in earnest next month, to average 3 per cent, in line with productivity increases, and so neutral for Bundesbank policy.