View from City Road: French celebrate with stability

French central bank independence looks like starting on a bright note. The Banque de France celebrates its political independence on New Year's Day with a currency stronger than at any time since the August currency crisis.

The franc was trading yesterday at around Fr3.4045 to the mark, comfortably above the former Fr3.4305 ERM floor, which it breached earlier this week. The recent recovery justifies the view that the franc did not deserve to be routed from the ERM on fundamental grounds.

Nevertheless, there has been plenty of confusion over French monetary policy since the ERM debacle. Like other members of the ERM, France conspicuously failed to exercise its new-found freedom to cut interest rates. The markets rationalised this behaviour by arguing that the French wanted to pay off the massive foreign currency debt incurred during the summer defence of the franc. Most of that debt has now been repaid - yet still the French authorities hold interest rates at a slight premium to German rates.

Indeed, one might almost believe that the French are now pursuing a German interest rate target rather than an exchange rate target. Either way, the result is the same. Paris is determined not to lose its inflation-fighting credibility with the financial markets, particularly since its low-cost inflation gives its producers the edge over German rivals with every month that passes.

It is also still mustard keen on monetary union with Germany, and sees currency stability as the best route. Plus ca change . . .