West German central bank stands pat on dollar

By , Staff correspondent of The Christian Science Monitor

The central bank of Europe's strongest economy, the West German Bundesbank, met Thursday for the first time since this summer's surge of the American dollar - and did not raise interest rates.

The Bundesbank, along with other European central banks, is also stepping back from intervention in the foreign-exchange markets to shore up its currency, and the dollar hit a nine-year high that day. In early trading, one dollar bought 2.7336 marks.

The Bundesbank did intervene modestly to strengthen the mark. But this was only enough to keep the dollar from soaring any higher and not enough to start it down again.

Recommended: Europe's debt crisis: 5 ways it's been put to good use

Many financial analysts think the present strength of the dollar is as irrational as was its low of 1.72 marks to the dollar in 1978.

The dollar's strength is a mixed curse for Europe. Gas prices at the corner service station are going up a few more pfennigs every week as dollar-denominated oil imports become more costly in marks. But the stronger US domestic recovery is expected to pull other Western economies up with it. And exports in European currencies that have been effectively devalued relative to the dollar are becoming more competitive.

The export pull is important. West Germany, with exports equivalent to 23 percent of gross national product, and the Netherlands, with 47 percent export dependence, traditionally rely on export booms to pull out of recession. Although 1982-83 looked like an exception, the domestic-led initial recovery out of West Germany's two years of negative growth has been weak.

In this context the Bundesbank decision not to go ahead with projected interest increases means a trust in exports - and benign neglect of the current outflow of German capital to the high-interest United States. The German discount rate has been 4 percent since cuts in March. By contrast, the prime rate usually charged in the US by commercial banks to their best customers, after a hike last Monday is 11 percent.

Under present conditions the West German economy is generally expected to grow between 0.5 and 1 percent this year. According to the semiannual report that has just been made by the Economics Ministry's chief economist, Otto Schlecht, this will not bring any drop in the current 2.3 million unemployment. It will entail keeping inflation down to a yearly average of 3 percent, however.

For the rest of this year, Mr. Schlecht expects a slakening in the growth of private consumption but a pickup in capital goods, construction, and exports.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...