Interest rates `cut' call presents poser for German government

Germany's new government looked set on a collision course with the Bundesbank yesterday as Mr Oskar Lafontaine, the man tipped to be Finance Minister, called for a cut in interest rates throughout Europe. The president of the Bundesbank, Dr Hans Tietmeyer, has insisted that there is no immediate justification for a cut in German interest rates from their present level of 3.30 per cent, although he did appear to hold out the possibility of further reductions in the international economic situation worsens.

Mr Lafontaine told the weekly news magazine "Der Spiegel" yesterday that, if the United States could cut rates in response to global developments, Germany could do the same.

"I think it is wrong for the Bundesbank to behave with their monetary policy as if there were no problems in the world's financial system. A cut in interest rates is economically justified in the rest of Europe too," he said.

Mr Lafontaine insisted that he was not questioning the independence of the Bundesbank or the European Central Bank (ECB) in setting interest rates. But he implicitly criticised the ECB president, Mr Wim Duisenberg, and said he wished Alan Greenspan, the chairman of the US Federal Reserve Bank, was running the ECB instead.

Germany's Social Democrats are working on a joint position paper with the French government, aimed at creating a political counterbalance to the ECB. And Mr Lafontaine responded sympathetically to a proposal by Italy's prime minister, Mr Romano Prodi, to use Europe's currency reserves, worth $120 billion, to fund a massive programme for growth and jobs.

The defeat of Dr Helmut Kohl's centreright government and the worsening global financial crisis have left Dr Tietmeyer and Mr Duisenberg increasingly isolated in their inflexible approach to monetary policy. But Mr Tietmeyer is ignoring the criticism and appears determined to remain firm to his strict, anti-inflation course.

"Nobody expects us to cut interest rates in Germany in the short term," he said.

Mr Juergen Pfister, an analyst at Commerzbank in Frankfurt, said yesterday that current economic conditions did not warrant any reduction in German rates.

"Domestic demand in the Euro area is moving upwards and our dependency on global economic trends is reducing. But if the crisis gets worse, the Bundesbank has enough powder dry," he said.