The international environment

Published on 01 September 1992

Growth of the world economy has yet to gain momentum. In North America, moderate expansion appears to be under way, but has not yet become firmly established. Japanese economic growth continued to slow during the first half of the year. In Europe, activity has generally been subdued, with the impact of restrictive monetary policies beginning to take hold in Germany and continuing to exert a negative impact on demand in most other countries.
On the inflation front, US and Japanese consumer price increases are expected to remain moderate and in Canada, inflation reached a twenty-year low. European inflation performance is more mixed. Rising unit labour costs have added to inflationary pressure in Germany, while rates of consumer price increase in Spain and Italy, though falling, remain high. Only in France, among the larger continental countries, has price performance been broadly satisfactory. Monetary aggregates are hard to interpret, having slowed significantly in Japan and the United States, but stabilised at a high level in Germany.
The apparent hesitancy of activity prompted the US Federal Reserve to cut interest rates by half a percentage point at the beginning of July, lowering the discount rate to 3.0%. The federal funds rate fell by a similar amount to 3.25%, and leading commercial banks responded by reducing prime lending rates from 6.5% to 6.0%. The weakness of activity and demand led the Bank of Japan to cut its Official Discount Rate by half a percentage point to 3.25% at the end of July.
The Bundesbank responded to continued strong monetary growth by raising its discount rate from 8.0% to 8.75% on 16 July, although market interest rates in Germany were largely unaffected. Some, though not all, European countries responded to the Bundesbank by tightening their own monetary conditions. The Banca d'Italia had to act forcefully on several occasions in June and July in response to pressures in financial and currency markets, precipitated initially by the uncertainty caused by the 'No' vote in the Danish referendum on the Maastricht Treaty.