UK strategy on inflation under fire: President of Bundesbank says British policy could destabilise the economy

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The Independent Online
HANS Tietmeyer, President of the Bundesbank, yesterday attacked the British Government's strategy of tackling inflation, saying it was too inexact and risked doing more harm than good.

Mr Tietmeyer was critical of the way in which the Treasury looked at a host of indicators - including money supply, exchange rate and house prices - to assess inflationary pressure. A policy of looking at everything, he said, was too unclear and lacked conviction.

The indicators are also too inexact, he argued, so that measures based on them risked having a destabilising, rather than a stabilising, effect on the economy.

Mr Tietmeyer also cast doubt on other British monetary innovations, such as the publication of discussions between the Bank of England and the Chancellor of the Exchequer, saying the benefits of such institutional changes were unproven.

Mr Tietmeyer's comments will come as an embarrassment to the Chancellor on the eve of his Mansion House speech, traditionally a keynote address on the handling of anti-inflation policy.

The Bundesbank president delivered a robust defence yesterday of money supply targeting and of the central bank's campaign to have the German model adopted Europe- wide in a future economic union. The Bundesbank has built an unrivalled reputation for anti-inflationary resolve since its foundation

after the Second World War.

Irrespective of the severe distortions of German money growth in recent months, M3 targeting would remain the key element in the Bundesbank's stability policy, Mr Tietmeyer said. There was no question of this 20-year-old tested approach being fundamentally questioned, he said.

Mr Tietmeyer was speaking at an international banking evening in Frankfurt in reply to Alexandre Lamfalussy, president of the new European Monetary Institute, who suggested that a looser combination of money targets than M3 might become necessary if monetary growth was too erratic. The designation of more than one money supply indicator would offer greater leeway of interpretation, he said.

Mr Lamfalussy, who has the tricky task of co-ordinating the debate between central banks about a future common European policy, offered some support to the Bundesbank's approach by noting that the money supply did matter for the medium-term behaviour of prices, whatever difficulties might be encountered in picking out the right M indicator.

Mr Tietmeyer dealt sceptically with alternative approaches, such as that being followed in Britain, saying they still had to prove themselves in stormy seas.

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