Sterling hit by German fears

MEMBERS of the 18-man Bundesbank policymaking council who are pressing for a further tightening of German credit conditions are understood to be gaining ground.

Recent speculation that the Bundesbank may be poised to lift some interest rates at Thursday's fortnightly council meeting, despite intense international concern, yesterday drove sterling and the dollar sharply lower against the mark.

The pound came under particularly strong pressure, falling by more than two pfennigs to DM2.8523, close to its all-time low in the European exchange rate mechanism.

The three-month interbank rate, which tracks City base rate expectations, edged up 1/8 of a point to 10 1/8 per cent.

Although sterling was still well above its absolute ERM floor of DM2.78, it was undermined by continuing speculation over devaluation despite the categoric rejection of this option last Friday by Norman Lamont. The Chancellor said then: 'We know from bitter experience that devaluation just does not work for Britain.'

Shares also fell on worries about the Bundesbank. In London, the FT-SE 100 index dropped 12.5 points to end at 2,478.3, while in Frankfurt the 30-share DAX Index fell by 17.98 points to 1,736.5, its lowest close for two months.

Weak British manufacturing figures for May, out today, may contribute to unease that the UK economy has yet to show signs of recovery and provide ammunition for Conservative MPs pressing for further interest rate cuts.

The dollar, meanwhile, sank by 1.63 pfennigs to end at DM1.48 but may gain some relief if today's US retail sales figures help to dispel the impression of a fading American recovery.

In the financial markets leading Bundesbank watchers expect the German central bank to shy away from the most aggressive action available - an increase in the key Lombard rate, now 9.75 per cent - and opt for lesser measures.

Herman Remsperger, of BHF- Bank in Frankfurt, said the Bundesbank could raise the discount rate, an emergency funding facility for banks which now stands at 8 per cent.

This move could be combined with a reduction in the amount banks can borrow at the discount rate, which would make the policy change even more restrictive.

A more extreme option would be to limit the amount that banks can borrow at the key Lombard rate. But these remedies may not necessarily bring about an increase in interest rates elsewhere in Europe, including Britain.

A senior German official yesterday declined to rule out another round of credit tightening. Horst Kohler, state secretary of the German Finance Ministry, speaking after a meeting of European Community finance ministers in Brussels, said the Bonn government was not asking for stricter measures. But he added they would 'accept the decision' of the politically-independent central bank.

Confirming that the debate under way at the Bundesbank was 'very intense', Mr Kohler acknowledged that other EC finance ministers voiced their concern at possible Bundesbank action later this week.

The Bundesbank's chief worry is excessive money supply growth, fuelled by the surge in subsidised credits to eastern Germany.

Bundesbank officials have publicly deplored the latest figures, for May, which show broad M3 money supply expanding at a 9 per cent annual rate compared with the fourth quarter of last year.

The Bundesbank has set a 3.5 to 5.5 per cent annual target range for M3, which it is expected to reconfirm on Thursday.

Those against a further tightening are said to argue that German inflationary pressures are being contained by the strong mark. They also emphasise that M3 growth may be distorted by special factors and may not entirely reflect inflation trends. The money supply expansion partly reflects the rush of funds into high-yielding short-term deposits which are part of the M3 measure.

Some Bundesbank officials are arguing that it is impossible to assess whether excessive monetary growth in eastern Germany is inflationary when the economy is being transformed from a command to a free market system.

Hamish McRae, page 21

(Graphs omitted)

Life and Style
A teenager boy wakes up.
Life and Style
It is believed that historically rising rates of alcohol consumption have contributed to the increase
food + drink
An Apple iPhone 6 stands on display at the Apple Store
businessRegulators give iPhone 6 and 6 Plus the green light
Arts and Entertainment
Critics say Kipling showed loathing for India's primitive villagers in The Jungle Book
filmChristopher Walken, Bill Murray, Scarlett Johanssen Idris Elba, Andy Serkis, Benedict Cumberbatch, Cate Blanchett and Christian Bale
Life and Style
Playing to win: for Tanith Carey, pictured with Lily, right, and Clio, even simple games had to have an educational purpose
lifeTanith Carey explains what made her take her foot off the gas
Arts and Entertainment
Arts and Entertainment
The White Sails Hospital and Spa is to be built in the new Tunisia Economic City.
architectureRussian billionaire designs boat-shaped hospital for new Dubai-style Tunisia Economic City
Arts and Entertainment
Life and Style
Arts and Entertainment
A still from Duncan Campbell's hour-long film 'It for Others'
Turner Prize 2014
Life and Style
food + drink
Arts and Entertainment
Tony Hadley in a scene from ‘Soul Boys Of The Western World’
musicSpandau Ballet are back together - on stage and screen
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Bearing up: Sebastian Flyte with his teddy Aloysius in Brideshead Revisited
lifePhilippa Perry explains why a third of students take a bear to uni
Arts and Entertainment
Sir Alan Sugar appearing in a shot from Apprentice which was used in a Cassette Boy mashup
artsA judge will rule if pieces are funny enough to be classed as parodies
Arts and Entertainment
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

SQL Developer (Stored Procedures) - Hertfordshire/Middlesex

£300 - £330 per day: Ashdown Group: SQL Developer (Stored Procedures) Watford...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style