W. German Central Bank Rejects Interest Rate Hike

West Germany’s central bank decided against raising interest rates today despite the battering the mark has taken from the surging dollar.

The dollar retreated after the Bundesbank, meeting in West Berlin, said it will leave credit policies unchanged. The U.S. currency had edged up all morning because of a growing belief that the Bundesbank would not be panicked and raise its discount and Lombard rates.

Confirmation that dealers had forecast correctly brought some sell orders to the market and the dollar settled around 1.9850 marks about half an hour after the news. It had been quoted at 1.9910 shortly before the announcement and at 1.9786 at the start of business in London.

West Germany raised its discount and emergency funding Lombard rates by half a percentage point to 4.5% and 6.5% respectively on April 20. That unexpected move was aimed at squeezing credit to fight inflation.

The central bank had been expected to consider another raise today to defend the mark against the dollar, which has risen more than 10% this year.

Japan hiked its discount rate three-quarters of a percentage point to 3.25% this week to slow the dollar’s rise against the yen. Britain upped its base rate from 13% to 14% May 24 to guard the pound.

Sterling continued under pressure today because of ebbing faith in the British economy, with inflation at an annual 8% and a swelling trade deficit. The pound dipped from a high of 1.58 marks to trade about 1.5650 in London after the Bundesbank announcement.

It was the dollar’s rise last week above 2 marks for the first time in 2 1/2 years that prompted speculation that Bonn authorities would want to support the mark and stave off the effects of imported inflation.