NEW YORK — Strongly defending his country's monetary policy against criticism by U.S. Treasury Secretary James A. Baker III, the president of West Germany's central bank Monday said that the United States, not West Germany, was to blame for triggering a recent global rise in interest rates.
Karl Otto Poehl, president of the Deutsche Bundesbank, also called the outlook for more stable currency exchange rates "better than many pessimists think," while playing down the importance of specific currency exchange rate targets.
Chain of Events
Poehl's remarks, delivered here Monday night to the American Council on Germany, were the latest volley in an increasingly heated exchange between U.S. and West German officials over the chain of events that led to Wall Street's Oct 19 crash.
Baker has blamed interest rate rises engineered by the Bundesbank shortly before the U.S. market crash for igniting the crisis in financial markets, while Western Europeans--including the West Germans--say that Baker himself brought on the stock market panic when he suggested that Washington would retaliate for the West German interest rate increases by letting the U.S. dollar float lower on world currency exchanges.
In the two weeks since Baker's remarks, world financial markets have undergone unprecedented turmoil and the value of the dollar has continued to drop--touching 40-year lows against the Japanese yen and nearing an all-time low against the West German mark.
Poehl's remarks Monday seem to indicate that West Germany now believes that the dollar will continue its tumble despite intervention by the central banks of West Germany, Japan and other industrialized nations. Higher interest rates abroad sometimes lead to a weaker dollar because money is lured out of dollar-denominated securities and into foreign assets.
But to blame the "slight increase" in German interest rates for last month's financial panic is misguided, Poehl said. "The global interest rate push was not set off by the slight increase in German securities repurchase agreement rates. . . . "There is no question that the global rise in interest rates started in the U.S.A."
"We are not at all interested in interest rates rising either in Germany or in the U.S.A."
While denying charges that the Bundesbank is "neurotic on inflation," Poehl said: "In a world of global external imbalances one can't have stable exchange rates and stable interest rates at the same time." And although stable exchange rates "are desirable, per se," he said, "in the end, stable exchange rates are not a goal in themselves. What we are really aiming at is a coordinated process of non-inflationary growth.
"Stable exchange rates are in the final analysis only possible against a background of widespread price stability." To concentrate instead on "over-ambitious commitments to peg certain exchange rate levels or target zones," Poehl said, is to "run the risk not only of clashing with domestic monetary objectives, but of collapsing when the markets test them."
In Bonn, meanwhile, West Germany's five leading economic research institutes called Monday for a speedup in planned tax cuts in order to expand the country's economy and ease global trade imbalances. In a joint report, the institutes also forecast that Western Europe's most powerful economy would grow by only about 2% next year.
The institutes added their voice to widespread official opinion in the United States and European nations that an expansion in the West German economy would serve to help stabilize the current world financial crisis.
However, senior West German government officials, told in advance of the report's contents, firmly rejected any idea of additional tax cuts. And they appeared to rule out any expansion in the economy, despite pressure from Washington, in order to keep inflation at a minimum.
"Measures to improve the climate for growth should be taken as soon as possible," said the report, which suggested that tax cuts scheduled for 1990 should be moved forward to 1989.
Debra Whitefield reported from New York and William Tuohy from Bonn.