There will be strong differences of opinion on the proper course of monetary policy at this weekend's meeting in Washington of finance ministers and central bankers from the world's major industrial countries.
The principal protagonists are the U.S. and Germany. The U.S. is pressing for lower interest rates to stimulate growth; Germany, concerned still about inflation, opposes a reduction in rates. It is unlikely the meeting will resolve these differing views. The final communique will probably say all parties agree lower rates are a worthy goal, within the context of fiscally responsible policies that will not fuel inflation.
The clash of opinion within the Group of Seven industrial countries highlights the difficulty of a country such as Canada adopting an independent policy. Canadian short-term rates have come down - this week the bank rate dropped to its lowest level since July, 1988 - but still have a way to go to provide the stimulus needed to start to lift the economy out of recession.
U.S. President George Bush has taken the lead in the G-7 in pushing for lower rates. ''We would like to see these interest rates down a little bit,'' he said this week. The U.S. government clearly sees the recent strength of the US$ as providing room for lower rates. Similarly, the strength of the C$ no doubt gave the Bank of Canada comfort and influenced this week's 17-point drop in the bank rate.
The Americans can't go it alone on interest rates any more than Canada can, so long as Germany and also Japan are resisting lower rates. A weakening anti-inflation resolve is quickly detected by the capital markets, making it more difficult for countries that show signs of accommodating inflation to attract investment. That is something the U.S. and Canada - both heavily in debt - need to keep in mind.
It's easy to blame Germany, especially, for making a general and rapid reduction of interest rates more unlikely. But Germany's good record on inflation has been achieved by attacking inflation before it takes root. If other members of the G-7, including Canada, had followed this course earlier, rates would be lower today. It is important now to keep vigilant about inflation pressures, so as to avoid having to jack up rates even higher down the road.
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Revised: June 3, 1995
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