Germany Hikes Its Discount Rate to 47-Year High of 8.75%
Shrugging off criticism from the United States and the European Community, Germany’s Bundesbank lifted a key interest rate Thursday to its highest level in the country’s post-World War II history.
The increase in the discount rate from 8% to 8.75% is expected to complicate attempts to regenerate global economic growth, at least in the short term. It will put pressure on Germany’s trading partners to raise their cost of borrowing.
The central bank’s action also could curb U.S. exports, since it will tend to slow Germany’s ability to buy American products. The Bush Administration has lobbied against higher German interest rates because they could hinder U.S. economic growth.
The increase in the discount rate followed a five-hour meeting of the bank’s 18-member governing council in Frankfurt am Main.
It was aimed at curtailing domestic inflation and checking growth in the money supply, which has been running at nearly twice the bank’s target level of 3.5% to 5.5% for the year because of the demands of financing reunification.
“With this measure, the Bundesbank aims to stem price pressures, monetary growth and excessive growth in credit volume,” the bank said.
Robert Brusca of Nikko Securities International in New York told the Associated Press that the economic fallout in the United States will be minimal, although it is a political embarrassment to President Bush.
At an International Monetary Fund meeting in Washington earlier this year, U.S. and German officials exchanged sharp words about Germany’s tough interest rate policy. Bush has encouraged the world’s economic leaders to lower rates. The Federal Reserve cut the U.S. discount rate two weeks ago to a 29-year low of 3% in an effort to boost the sagging economy.
“Hiking a rate like this is not in the spirit of the Munich summit,” Brusca said of the German move. “It’s an embarrassment for someone (Bush) who’s supposed to be strong on the international side.”
Bundesbank President Helmut Schlesinger defended the decision by saying that “it is important that we keep our house in order at home, even if it means unavoidably complicating the international situation.”
In an apparent attempt to cushion the international impact of its move, the Bundesbank did not increase the Lombard rate, an effective ceiling on overnight loans that is now 9.75%.
Because of the German deutsche mark’s position as the bellwether currency in Europe, several other central banks--Italy, Belgium, Austria, Spain and the Netherlands--also raised their interest rates, despite their sluggish economies.
But Britain, struggling to emerge from one of the worst recessions of the post-war era, failed to follow suit. Prime Minister John Major’s government appeared to brush off opposition calls for a devaluation of sterling in Europe. France also declined to increase its discount rate.
In world currency markets, the dollar lost nearly a pfennig in European trading, closing in Frankfurt and New York at 1.4750 marks.
The Bundesbank’s move--which comes within a few days of personal pleas by French Finance Minister Michel Sapin and his British counterpart, Norman Lamont, to hold the line on interest rates--was interpreted as a signal that under Schlesinger’s leadership the central bank is unlikely to waver from its assessment that controlling inflation is the highest priority. The bank wants to bring inflation, which has been running at 4.3% annually, to less than 4% by year’s end.
The discount rate increase also is a confirmation that after the turbulent run-up to German currency union and unification in 1990--during which Chancellor Helmut Kohl’s government repeatedly overruled Bundesbank advice--the bank has become its own master again.
The unexpectedly high costs of German unity, coupled with the government’s decision to finance the costs by borrowing rather than raising taxes, have been key factors in driving up interest rates.
