Germany's top bank cuts 2 rates Move intended to aid Europe's ill economy

April 23, 1993|By New York Times News Service

BONN, Germany -- Answering calls from France and elsewhere to stimulate the sagging European economy, the German central bank again lowered two of its key interest rates yesterday amid signs that Germany's recession had worsened substantially in recent months.

Symbolically at least, the Bundesbank's rate cuts, the second round in about a month, amounted to a German gesture of economic solidarity with France, its most important European partner, whose new government has been reducing its own interest rates and calling for the Bundesbank to cut its rates further.

The bank reduced the discount rate, the rate it charges commercial banks for short-term loans, to 7.25 percent, from 7.5 percent. The bank, which is not obliged to take instructions from the German government, also cut a second important indicator, the Lombard rate, which sets a ceiling on money-market interest paid, to 8.5 percent, from 9 percent.

Long-term German interest rates have fallen as low as 6.5 percent for some public issues.

The cuts are intended to stimulate economic growth by making it easier for German businesses to borrow money and for the authorities in other countries whose currencies are linked to the mark in the European Monetary System to cut rates, too. Belgium, Denmark, Italy and the Netherlands all announced small reductions yesterday.

Despite the rate cuts, the dollar ended broadly lower, dragged down by further gains in the Japanese yen.

The Bundesbank's announcement came amid a flood of bad economic news. German officials told news organizations that their economy, the engine of European growth, might shrink as much as 2 percent this year. Last year, according to a Dun & Bradstreet study, 210,000 enterprises went bankrupt all over Europe -- including 57,600 in France, 62,700 in Britain and 10,000 in western Germany -- in the most severe European recession since the early 1970s.

Mercedes-Benz AG announced that it had sold 32 percent fewer cars in the first three months of this year than in the same period in 1992. And the German Economics Ministry conceded that pessimism in German industry was deepening. Faced with declining tax revenue, the German federal budget deficit could reach $43 billion this year.

The central bank announced that it had taken cautious action on interest rates after the new French prime minister, Edouard Balladur, completed his first visit with Chancellor Helmut Kohl. Mr. Kohl said he and Mr. Balladur had discussed interest rates and that the Bundesbank's steps to reduce rates gradually over the past few months had been "positive."

In Washington, Treasury Secretary Lloyd Bentsen said the United States welcomed the German move.

Whether Mr. Kohl had pressed the French prime minister on trade issues as much as Britain and the United States would like was not clear. At a news conference, both men said they had agreed on the need to resolve the remaining issues holding up an agreement on global tariffs and trade.

"We all need GATT, but it requires readiness for compromise," Mr. Kohl said. Mr. Balladur said he hoped Germany would understand French concerns about agriculture. French rejection of a European compromise with the United States on agricultural subsidies prevented completion of an accord last year.

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