West Germany May Hike Rates

West German interest rates appear set to rise today and, however reluctantly, much of the rest of Western Europe may have to follow suit.

A general upturn in European interest rates would diminish the attractiveness of U.S. dollar-linked investments.

Markets have rarely been so well-primed for a rate rise, widely expected after today’s meeting of the policy-making council of the Bundesbank, West Germany’s central bank.

Economists predict a rise of a half to a full percentage point in the Bundesbank’s discount and Lombard rates, currently at 5% and 7% respectively.

Other countries will have to match any move by the powerful West German bank, European bankers and officials say.

“European monetary policy is, for all practical purposes, decided in Frankfurt,” a senior West German banker said, touching a raw nerve in European economic policy relations.

“Whether they want to or not, the others are going to have to join in,” a Frankfurt-based economist added.

The Bundesbank’s latest economic report said West German interest rates were relatively low, and Bundesbank President Karl Otto Poehl has been wondering out loud if interest rate levels were consistent with the pace of economic growth.

Inflation is now just over 3%, but the Bundesbank worries that prices could start rising more quickly with the economy surging and industrial capacity stretched.

West Germany has often drawn fire from its European partners, who charge that the Bundesbank is obsessed with inflation and dictates monetary policy in Europe.

France, which steadfastly rules out a depreciation of its franc against the West German mark, would also probably raise rates.