EUROPE is holding its breath for the Bundesbank to significantly reduce interest rates, but Germany's central bank is more likely to make a series of small adjustments downward than a quick, major relaxation.
Bundesbank deputy president Hans Tietmeyer says there has been "no fundamental change" in most of the factors that determine interest rate policy and so the bank is "staying the course."
Even so, the Bundesbank can still show "flexibility," Mr. Tietmeyer said in an interview with the Monitor. He cited the Jan. 7 decision to slightly lower short-term money market rates from 8.75 to 8.6 percent as an example. Both the slumping German economy and tension in the European Exchange Rate Mechanism influenced the decision, Tietmeyer said.
In setting interest rates, Tietmeyer emphasized that the bank is looking at tendencies and not for major, near-term corrections in key factors such as inflation and monetary growth. "I'm living in this world, and I'm not talking about bringing the inflation rate down tomorrow to 2 percent," which is the bank's goal for underlying inflation and about half of this year's expected rate.
Tietmeyer called relatively low producer prices "a small improving factor," but indicated that the bank's main concern regarding inflation is trend-setting wage talks to be held over the next few weeks. In comparison to last year, when unions won average wage increases of 5.6 percent in west Germany and 20 to 25 percent in east Germany, wage restraint this year looks more likely as unemployment tops 3 million.
The growth of the money supply, the most important factor in determining interest rates, is averaging around 9 percent (as measured by M-3) - high above growth targets.
Tietmeyer, however, said he does not "exclude" the possibility of meeting this year's M-3 growth target of 4.5 to 6.5 percent. This was adjusted from last year's growth target of 3.5 to 5.5 percent, which many economists criticized as too limited, given the substantial need for deutsche marks in east Germany as well as East Europe, where the mark is almost a second currency.