Germany rejects call for rate cut

HELMUT SCHLESINGER, the Bundesbank president, yesterday rejected foreign pressure for an early easing in German interest rates as the Bundesbank's latest monthly report made clear that persistent inflation left no prospect for a relaxation in policy.

Mr Schlesinger's speech came as Michel Camdessus, head of the International Monetary Fund, called for an early cut in German rates and the French franc came under renewed pressure because of growing fears that the recent increase in French rates would damage the economy.

In a speech at the University of Frankfurt, Mr Schlesinger said: 'The pressure from some of our partner countries for an easing in German monetary policies, even though the goal of price stability has not yet been achieved, would only raise new mistrust.'

The Bundesbank president reaffirmed the central bank's belief that, based on economic fundamentals, there was no reason to devalue the franc.

Despite persistent intervention by the Bundesbank and the Banque de France yesterday, the franc ended little changed at Fr3.4180 to the mark, against its European Monetary System floor of Fr3.4305.

Strong statements of support for the franc by Pierre Beregovoy, the French Prime Minister and architect of the franc fort policy, had little impact. Mr Schlesinger, moreover, made it plain that the Bundesbank would not cut rates, either to salvage the franc or in exchange for a devaluation of the French currency, if it was not ready to do so for domestic reasons.

The Bundesbank's latest report said that the persistence of 'obstinately high inflation' offered no prospect of a relaxation in German monetary policy.

Sending an uncompromisingly tough message in its final monthly report of 1992, the central bank said that current and prospective price trends both pointed to the need for a strict monetary policy.

An expansive monetary policy could temporarily ease the setbacks in production and employment, but this would be at the price of a later acceleration in inflation and even harsher monetary restrictions, the report said.

The Bundesbank described its recently announced M3 monetary growth corridor for 1993 of 4.5- 6.5 per cent as 'undoubtedly ambitious', but the 'short-term goal must be to lead the growth back into the corridor'. In October, M3 grew at an annualised rate of 10.3 per cent.

While noting that capital market rates in Germany had now dropped to the comparatively low level of 7.25 per cent, the Bundesbank emphasised that this implied no fundamental shift in its policies.

'Given the persistent and intolerable level of price inflation, and the extraordinary strength of monetary expansion, there can be no reason to expect any such shift,' the report said.

It said growth had slowed sharply in western Germany while there were no signs of the eastern German economy developing self- sustaining momentum.

The result had been a dramatic falling off in employment, orders and investment.

But to the Bundesbank's dismay, this economic weakness showed no sign of having an effect on inflation or monetary and credit expansion.

An increase of 1 per cent in VAT in January, as well as rises in rents and utility prices in the east, will provide further boosts to inflation. Core inflation (excluding food and energy) is running at around 5 per cent.