German bank lowers 2 key rates Pleas from abroad prompt moves

July 02, 1993|By New York Times News Service

BONN, Germany -- The German central bank lowered two key interest rates yesterday, answering calls from President Clinton and European leaders to loosen the monetary reins in Europe's largest and most depressed economy.

The Bundesbank's moves, which were made at a meeting in the economically devastated eastern German city of Leipzig, also took Chancellor Helmut Kohl off the hook on the issue of high German interest rates in advance of next week's summit meeting in Tokyo of the seven leading industrial nations.

The bank's central council reduced the discount rate -- the rate it charges commercial banks for short-term loans -- to 6.75 percent, from 7.25 percent, the lowest level since early 1991.

It also cut a second measure, the Lombard rate, which acts as a ceiling on money market interest, to 8.25 percent, from 8.5 percent.

The decision yesterday to reduce both rates was the fifth in a series of reductions that began in September, when they were at post-World War II highs of 8.75 percent and 9.75 percent, respectively.

"The money market can no longer say we have a high interest rate policy," said Dr. Helmut Schlesinger, who as president of the Bundesbank since 1991 has been criticized throughout Europe and in Britain for having waited far too long to bring rates down, and then for reducing rates only in modest steps.

"Everyone understands that the G-7 governments want to see lower German interest rates," said Peter Pietsch, an economist with Commerzbank A.G. in Frankfurt, referring to the Group of Seven industrial nations.

"I think today's step is a reasonable effort to meet those concerns and will be a positive contribution to the Tokyo summit," he said.

The bank had made its last cut on April 22, before a series of pessimistic economic forecasts predicting that German economic activity would shrink by more than 2 percent this year and drag the rest of Europe down.

Mr. Clinton had pleaded Wednesday for a further reduction. "I think the German central bank should continue to lower interest rates there so that all of us together can expand this economy," he said at a photo session with congressional leaders in Washington. The White House welcomed the bank's announcement yesterday.

Financial and monetary analysts had been expecting a further move by the bank, and in anticipation the dollar had surged -- to 1.7103 marks on the currency markets in Frankfurt yesterday, 7.3 percent higher than its value at the beginning of June.

After the announcement, the dollar retreated somewhat, to 1.7055 marks in late trading in Frankfurt.

Since the Bundesbank was considered unlikely to make any further decisions on interest rates until the end of summer, other bankers thought any significant rise in the dollar's value would come only if the Federal Reserve Bank in Washington raised its discount rate, which is now 3 percent.

Since spring, the Bundesbank has had one eye on the effects in the currency markets of its decisions affecting the mark.

Mr. Schlesinger said yesterday that the bank was determined to preserve the currency's position as an anchor in the European monetary system, and analysts said that the reduction seemed unlikely to endanger it.

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