Settlements Bank Opposes Bush's Appeal for Rate Cuts

BASEL, Switzerland - Central banks should give priority to fighting inflation and be wary of cutting interest rates in an attempt to pull economies out of a cyclical downswing, the Bank for International Settlements said.

In its annual report, the BIS said economies take a long time to respond to changes in monetary policy, so attempts to use monetary policy to eliminate swings in the economic cycle are a hazardous undertaking.

The bank did not mention the United States by name but made clear that it does not support the Bush administration's appeals to other countries to give priority to increasing economic growth by cutting interest rates.

Limit to Policy Seen

It said those urging cheaper money believe "real" interest rates are too high and recession should be tackled by bringing down nominal long-term rates.

"Few now believe that monetary policy is in fact capable of imparting a lasting stimulus to economic activity," it said.

In another section of the report, the settlements bank said European banks overtook their Japanese rivals as the main driving force behind expansion of the international banking market in 1990.

Focus on Inflation

On the policy issues, it added that "monetary policy should have a medium-term orientation, concentrating on containing inflation and avoiding stop-go policies," the bank said.

The settlements bank, which acts as a central bank to central banks, said policymakers faced problems on all fronts, including the continuing debt crisis, the reform of eastern Europe, and exchange rate strategy.

But policy issues connected with the business cycle currently cause the most concern to central banks, it said.

It said those urging cheaper money believed "real" interest rates were too high and recession should be tackled by bringing down nominal long-term rates.

No Impact on Long Term

But the problem is that central banks only have close control over short-term rates, it added. A reduction in those rates would not necessarily lead to a decline in long-term rates.

In its statistical report, the Basle-based agency said European banks accounted for more than 75% of last year's $787 billion expansion in international bank assets, up from an average of 35% of the growth in preceding years.

Japanese banks accounted for less than 20% of last year's increase, down from 39% of 1989's gain, it added in its annual report.

The BIS said borrowing and lending by Japanese banks was constrained last year by the sharp drop in Tokyo stock prices, declines in yen bond prices, and depreciation of the yen.

Japanese banks responded to the equity market slump by issuing $18.7 billion in subordinated loans from June to September, by reducing asset growth, and by selling loans, the BIS said.

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