U.S., Partners Try to Calm Fears Over Bonn Interest Boost
Leaders of the United States and its major trading partners sought Monday to calm the world’s jittery financial markets in the face of further signs that West Germany will raise interest rates this morning.
West German Finance Minister Gerhard Stoltenberg told reporters that the small increase, to be formally announced today by the Bundesbank, West Germany’s central bank, is “a very minor decision” designed to bring central bank rates in Germany “into line with the markets.”
U.S. officials also tried to play down the significance of the West German move.
“We’re not concerned by it,” Treasury Secretary James A. Baker III said. He described the rate increase--from 3.25% to 3.5% in the key short-term lending rate--as “a technical reaction . . . consistent with the overall understandings” reached last Dec. 22 by economic officials of the seven major industrial nations in their latest accord to stabilize the dollar.
Changed Circumstances
The situation stood in marked contrast to similar circumstances eight months ago, when Baker openly objected to a West German decision to raise interest rates for fear that it would lead to a slowdown in worldwide economic growth. The public row heightened nervousness in the financial markets and contributed to the Oct. 19 stock market crash.
Officials participating in Monday’s discussions said there was no immediate indication that other countries, such as Japan, were planning to join the West Germans in raising interest rates, as had been speculated in the financial markets.
Too sharp an increase in interest rates could panic the markets and ultimately slow economic growth.
West German officials said their rate increase is needed to combat inflation. The West German mark has been weakening recently in relation to other currencies because of concern over the prospects of inflation.
U.S. officials have quietly cautioned the West Germans that they would be displeased if Frankfurt tightened its monetary reins any further, at least for now. U.S. officials are worried that the Federal Reserve would have to follow suit to defend the U.S. dollar if West Germany raised interest rates again.
Threat to GOP?
The Reagan Administration fears that any significant drop in the dollar this year could bring on a financial crisis that would damage the chances for the Republicans to retain the White House in November’s election. U.S. trading partners also worry that a disturbance in currency markets could require their central banks to expend their reserves again to support the dollar.
Apart from accepting the West German interest rate boost, leaders of the seven nations participating in this week’s summit--the United States, West Germany, Japan, Britain, France, Italy and Canada--so far have all but ignored fears about inflation. They insist the problem is not severe enough these days to qualify as a serious issue.
Baker, who has been criticized recently for ignoring the threat of inflation, asserted that the seven top finance officials are agreed that “we must remain vigilant” against a renewal of inflationary pressures. He reiterated, however, that inflation was “under reasonable control.”
Meanwhile, European officials said they still oppose the omnibus trade bill now being refashioned by the Democratic-controlled House.
‘Bill Still Bad’
Willy de Clercq, the Common Market’s top trade official, told reporters on Monday that although the measure had been “improved” over previous versions, it was “still a bad bill.” He said Europeans would rather see “no bill at all.”
President Reagan, who vetoed an earlier version of the bill, has said he will sign a remodeled bill if a provision regulating plant closings and other minor measures are eliminated from the original. Nevertheless, he continued to win praise from the Europeans for his resistance to protectionist pressures within the United States.
The only blemish in the convivial atmosphere at the summit was the continuing dispute over how to deal with excessive farm subsidies in the industrial nations.
Baker acknowledged that the United States is not “ecstatic” about the fuzzy compromise language expected to be adopted by the leaders on the farm issue. He said the best the Administration could hope to achieve was to prevent any “backsliding” from the positions previously agreed upon by major nations.
Tentative Accord
Separately, lower-level negotiators from the seven countries reached tentative agreement on a U.S. proposal to adopt a new commodity price index as one of the early-warning signs that the finance ministers watch in their efforts to coordinate their economic policies. Such cooperation is aimed at keeping exchange rates more stable and shrinking the excessive U.S. trade deficit while reducing surpluses in Japan and West Germany.
The new indicator of future inflation, to be approved by the heads of government today, will contain two separate components--one measure that includes oil prices and another that omits them from all calculations. As reported previously, gold prices will be included in both indexes, accounting for 10% of the index without oil and 5% of the oil-based index.
The negotiators were also reported close to agreement on another widely expected proposal, a plan to provide debt relief for impoverished African countries that owe money to Western governments.
Under the measure, the larger countries would be able to choose from a menu of options, including forgiving some of the debt and stretching out repayment schedules, for easing debt-service costs of African nations. The United States has already indicated it will choose stretchouts.
