Be careful what you wish for....(2)

One thing that is often forgotten amongst the discussion of whether the EUR will take the USD role as the world's reserve currency is that the Bundesbank fought for years to prevent the D-mark taking on that role. The concern at the German central bank was that this could force them to draw their attention away from domestic price stability. Indeed, they had a good taste of that with the D-mark's role in the ERM with, notably, Norman Lamont famously haranguing Helmut Schlesinger in Bath for lower rates. In 1998 the Fed cut rates not just for the US economy but also to provide financial stability globally. Today the WSJ makes the point that the ability of the Bank of England to stand back and allow short term interest rates to rise owns something to the pound not being a reserve currency. It may also be related to the way the UK money market has an automatic penalty window that puts a 75bp cap on overnight rates. More on that here and here.