Euro Vision: Bundesbank Signals Lower Rates Ahead By Ned Stafford Special to TheStreet.com 11/6/98 6:42 PM ET
FRANKFURT -- Prospects for the euro's smooth launch have been greatly enhanced by signs of rapprochement between the Bundesbank and the newly elected Social Democrats -- as well as a whopping rate cut today by Ireland.
In one fell swoop, the Irish central bank sliced its key repo rate by 1.25 percentage points to 3.69%, compared with the Bundesbank's repo rate of 3.3%. Ireland was the last of the four high-interest-rate euroland nations to cut to 4% or below, the others being Spain, Portugal and Italy. On Jan. 1, when European monetary union starts, the European Central Bank will set one rate for all 11 participating nations, using the Bundesbank's low rate as its guide. Ireland's move combined with an apparent peace between Bundesbank President Hans Tietmeyer and German Finance Minister Oskar Lafontaine make a Bundesbank rate cut highly likely by mid-December.
The press and markets today were still abuzz with talk of battles raging, but a read between the lines indicates that Tietmeyer and Lafontaine have laid down their swords.
Lafontaine, who was belligerently calling for a rate cut, arrived in dramatic fashion at yesterday's Bundesbank council meeting, landing by helicopter on the Bundesbank's lawn. There, Tietmeyer waited to greet him.
Tietmeyer, in a speech last night, strongly criticized political attempts to pressure the Bundesbank to cut rates. And, as expected, the Bundesbank kept rates unchanged. But he nonetheless set the stage for lower core European rates. What Tietmeyer, a master of central-bank-speak, did acknowledge was that low inflation in Euroland had opened up "enormous opportunities" for lower rates.
And if the Bundesbank decides conditions are right for a rate cut, "we will do this even if the decision meshes with the public advice offered."
And Lafontaine, widely criticized throughout Germany for using his office as a bully pulpit against the Bundesbank, appears to have learned his lesson. He became repentant after yesterday's meeting, saying no government member questioned the independence of the Bundesbank or the European Central Bank. Tietmeyer's pro-rate-cut comments were backed up this morning by Otmar Issing, former Bundesbank chief economist and now a member of the ECB's executive board.
He echoed Tietmeyer, saying political pressure for rate cuts wouldn't prevent the ECB from monetary easing if economic conditions call for it. Issing, a fierce monetary hawk, added, "The price outlook in the euro area shows no inflationary danger."
Uwe Angenendt, chief economist at BHF Bank in Frankfurt, is one of many economists who think the decelerating German economy needs a rate cut. Were it not for the Jan. 1 launch of the single currency and the need for the 11 participating nations to converge to one rate, he thinks the Bundesbank would have already eased.
"I see a dramatic slowing in the German economy," he said. "And there is absolutely no price pressure."
Evidence of a slowdown abounds. German manufacturing activity contracted in October, according to the Purchasing Managers Index, released last week. Morgan Stanley economists forecast that German GDP will grow a mere 1.5% in 1999, compared with around 2.7% this year.
Gernot Nerb, director of the Ifo economic research institute's business survey, says there's still a chance the Bundesbank will cut rates, provided "Lafontaine keeps quiet."
But before moving, the Bundesbank will want more confirmation of a slowdown from important economic reports due out in coming weeks. The reports include industrial production, the Ifo business survey and inflation numbers.
With the start of the European monetary union just weeks away, and fresh signs of weakness in the French and Italian economies, few think the Bundesbank and ECB would risk exacerbating the slowdown to prove political independence. Tietmeyer and Issing made that clear in their comments, and so did ECB President Wim Duisenberg Tuesday.
"I think there is no question that a rate cut is needed," Nerb said. "Almost everyone would agree. The Bundesbank would not hurt its credibility by cutting rates. On the contrary, it would help their credibility."