ECONOMIC SPOTLIGHT - DUTCH EXCHANGE RATE POLICY Recent slackness on Dutch capital markets has led some bankers to question the Central Bank's policy of pegging the guilder firmly to the West German mark and to ask for more flexiblility in exchange rate policy. While agreeing with the Bank's commitment to defend the guilder strongly, some bankers want the Bank to make more use of the range within which the guilder and the mark can fluctuate against each other in the European Monetary System (EMS). Roelof Nelissen, chairman of Amsterdam-Rotterdam Bank NV (Amro) said the Central Bank's policy was overcautious. "I would like to suggest that the Bank use more freely the range given to the guilder in the EMS," Nelissen said at the presentation of Amro's 1986 annual report last week. Within the EMS, the mark is allowed to fluctuate against the guilder between 110.1675 and 115.235 guilders per 100. The Central Bank maintains a stricter policy and tries to keep the mark below the 113.00 guilders per 100. It regards a stable exchange rate as its main target, using interest rate policies to influence the exchange rate. The preference of exchange rate goals above interest rate aims goes almost undisputed in the Netherlands. Critics say the Bank keeps the reins unnecessarily short. Rabobank Nederland said in its latest economic bulletin: "By maintaining the 113.00 limit, the Central Bank raises the expectation it will always intervene above that level. If it suddenly needs more flexibility it will find it very hard to obtain." Amro's Nelissen said relatively small changes in interest rates and exchange rates could cause substantial flows of securities business and sharp fluctuations on the Dutch capital market. Large interest rate changes were often needed to bring about small changes in the guilder/mark exchange rate, he added. Unlike Amro, Algemene Bank Nederland NV (ABN) says this is a price the Dutch have to pay. It fully agrees with the Central Bank's policy, director-general Julien Geertsema told Reuters, noting a 1983 decision not to revalue the guilder fully with the mark in the EMS hurt confidence in the Dutch currency. "It is a pity we need such a wide interest rate difference between West Germany to maintain the exchange rate," he added. Interest rate differentials between West Germany and the Netherlands are the main factors that trigger capital flows between the two countries, as the economic performance of the two does not differ much, economists said. Data on 1986 capital flows between West Germany and the Netherlands have not yet been released, but in 1985 they accounted for only 10 pct of total trade flows between the two countries, put at 110 billion guilders for 1986 by the Dutch-German Chamber of Commerce earlier this month. Economists say capital flows are more sensitive to interest and exchange rates. West Germany is the Netherlands' largest single trading partner, taking 28 pct of Dutch exports and providing 26 pct of imports in the last quarter of 1986, Central Bureau of Statistics figures show. At the moment, the rates for three month euromark deposits trade around 4.0 pct while the same deposits in guilders have a rate of around 5-7/16 pct. Amro bank argues that the Dutch real interest rate will even rise further because of expectations of deflation here in 1987, contrasting with slight inflation in West Germany. In the Netherlands, the cost of living is expected to decrease by 1.5 pct at a GNP growth rate of two pct, the Dutch Central Planning Agency said in its 1987 forecast last month. German GNP is seen rising by two to 2.5 pct, but with inflation between zero and 1.0 pct, according to most German forecasts. But despite this upward push on real Dutch rates, money dealers do not expect the Central Bank to cut official rates independently without prior moves by the Bundesbank. Following the West German interest rate cuts on January 22, the Dutch Central Bank did not lower its rates but set a 0.5 pct lower tariff for special advances and abandoned its credit surcharge. Most traders were surprised by this move as they had expected the Bank to follow suit unconditionally, they said. The Bank said it lowered the rate with the largest impact on the money market as far as the exchange rate permitted. While not entirely unsympathetic to critics of its policies, the Central Bank keeps its grip firm and the range narrow. "The European Monetary System is not only a relationship between the guilder and the mark. Many times widening of the margin between the two would implicate we have to buy or sell large amounts of a third currency," Central Bank vice-director Jan-Hendrik Du Marchie Sarvaas said. "If we allowed the guilder to become a little cheaper, the markets would start to believe it was weak. We don't want that. We want to make clear that the guilder is just as strong as the mark," he said.