The West German central bank yesterday announced it would push a higher interest-rate policy in an effort to bolster the mark, which has been; declining sharply in international markets, especially in relation to American dollars.
At a meeting of the Bank's Central Council in Frankfurt, the highly symbolic Lombard rate, which governs the extension of credit to commercial banks, was abolished in favor of a new and more flexible standard.
One immediate result was a slippage in the dollar in international markets, with trading in New York described as "hectic." The dollar closed in New York at 2.1140 marks, down from 2.1783 marks on Wednesday. Dealers also said that Euromark deposits were marked up one-quarter point across the board, folowing the change in the Lombard system.
In recent months, high interest rates here, far exceeding the West German structure, have attracted investment funds from Germany and elsewhere into the United States, strengthening the dollar against the mark. Last week, the dollar rose above the 2-mark level to its highest point in four years, and costly German Central Bank intervention to prop up the mark proved largely unsuccessful.
In the view of some market analysts aboard (as well as in this country), the U.S. interest-rate trend will continue upward as a consequence of the Reagan economic program, although one of the stated goals is to reduce the levels of interest rates.
In an interview yesterday, former Treasury assistant secretary for international affairs C. Fred Bergsten said that from an international standpoint, the Reagan policy is just the opposite of what it ought to be.
"As I see it," Bergsten said, "fiscal policy will be stimulative, and monetary policy will have to remain tight, forcing up interest rates and making the dollar even stronger. A better policy mix would be a tightenting fiscal policy, and a less stringent monetary policy."
Some observers think that the dollar already may have risen to the point where it could dampen the attractiveness of American exports. A sharp improvement in exports last year, contributing to a small surplus in the U.S. current account, is generally credited to the pre-1980 decline in the dollar value in international markets, making U.S. goods more competitive.
The Lombard rate, which will be suspended indefinitely as of today, was at 9 percent, while the regular German discount rate -- which remains unchanged at 7 1/2 percent -- will continue in force. The U.S. discount rate is 13 percent, with an additional surcharge of 3 points for some.
The perplexing dilemma for German policy-makers is that they must walk a tightrope between the need to keep interest rates high enough to support the mark in international markets without refueling inflation at ; home and low enough to reestimulate a sagging domestic economy.
According to wire service reports, Central Bank President Karl Otto Poehl told a press conference following the suspension of the Lombard rate that the new policy would lead to rising German interest rates. He said that in place of the Lombard rate the Bank would create a special "Lombard facility" which would leave to the Central Bank's discretion the conditions under which it would make loans to German institutions.
Apparently, the special Lombard rate could vary from day to day. A Bank statement said that "the introduction and termination of special Lombard credits will be announced separately." Officials also said that restrictions on the sale of West German securities abroad would be loosened to allow foreigners to buy such paper, even where maturities are less than a year.
Outside observers said that the new system not only would give Poehl greater flexibility but conceivably could allow the adjustment of rates; without the publicity which normally attaches to a change in the widely followed Lombard rate.