The international environment

• Policy easing by the Federal Reserve has laid the foundations for recovery in the United States. Activity indicators generally point to recovery proceeding at a weak rate. In Japan and Germany, evidence is mounting of a gradual slowdown in activity. Labour markets in both countries remain tight and this has contributed to growth in real wages and consumption, thereby offsetting to some extent signs of weakening in the business sectors.
• The Bundesbank has repeatedly expressed its concern over persistent inflationary pressures in Germany. The annual rate of French inflation has been around 1% lower than in Germany since July, and French and German short-term interest rates are currently close to parity.
• The differential between short-term interest rates in Germany and the United States has risen to an historically high level. This has contributed to a partial reversal of the gains made by the dollar earlier in the year. The higher yields on yen assets vis-a-vis the dollar and the widening Japanese current account surplus have contributed to the strength of the yen.

The international environment