View from City Road: Bundesbank's dilemma on interest rates
Friday 25 June 1993
Its fall by eight pfennigs against the dollar to DM1.70 in just 10 days is cancelling out some of the anti-inflationary benefits that its previous rise against the pound and other European currencies brought after Black Wednesday.
With German inflation still at 4.2 per cent, the highest in the Group of Seven industrial countries - yes, including Italy's 4 per cent - the monetary hawks of Frankfurt must be seriously considering whether they need an interest rate rise rather than a cut.
The tactical question for the Buba must now be whether a rate rise would prove as counter-productive as it did in Britain in September. Would the markets really believe that it could be sustained when German industrial production has fallen even faster than Britain's?
The strategic question is whether the Buba should even try. Some of the mark's rise and now fall against the dollar is merely cyclical, as Otmar Issing argued yesterday. Recession points to lower interest rates in Germany, while recovery indicates higher ones in the US.
But the foreign exchanges are also like other asset markets. They tend to overreact. Most competitiveness measures, such as those in the graph, show that the real value of the mark has overshot its long-run value sharply since the Berlin Wall came down in 1989.
This was the response, entirely expected by standard theory, to the interest rate rises that the Buba imposed to staunch the inflationary pressures of unification. But the theory also supports common sense - what goes up must come down.
- 1 Boston Marathon runner's search for mystery man she kissed ends with letter from his wife
- 3 Frankie Boyle on Scottish independence: 'In the Interests of Unity, F**k Off'
- 4 How to gain confidence and maximise your sexual potential
- 5 Chinese theme park sets up 'death simulator' where volunteers can experience being cremated
Saudi Arabia's King Salman sacks senior aide for 'slapping' a journalist behind him live on TV
Boston Marathon runner's search for mystery man she kissed ends with letter from his wife
Frankie Boyle on Scottish independence: 'In the Interests of Unity, F**k Off'
Italian police 'reveal' what Jesus looked like as a young boy
Florida couple forced to register as sex offenders for having sex on public beach
In defence of liberal democracy
General Election 2015: Post-election 'shambles' looms as 70 per cent of voters say SNP 'should not be able to veto UK government policies'
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
General election live: SNP suspends two members for disrupting Labour rally
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...
£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...