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Europe Banks Slash Interest to Aid Dollar : Bonn, Paris, London Lead Damage Repair in Market's Collapse

December 03, 1987|Times Wire Services

The central banks of West Germany, Britain and France today led a round of European interest rate cuts aimed at shoring up the U.S. dollar and helping repair the global damage from October's stock market collapse.

The dollar rallied in Europe after edging lower earlier in the day.

The Bundesbank, the central bank of West Germany, said it was cutting its discount rate, the benchmark rate at which it lends funds to private banks, to a record low 2.5% from 3%.

The Bank of England cut its money market rate to 8 3/8%, a signal that led several British banks to cut their base lending rates half a point to 8.5%.

Those reductions were accompanied by interest rate cuts in France, Austria, Switzerland and the Netherlands.

The Bank of England's move to support the dollar, the third half-point reduction in the base rate since the Oct. 19 market crash, took the markets by surprise.

The West German cut, which follows reductions in less significant interest rates by that country, had been urged by the United States and other nations.

It also follows the multibillion-dollar economic expansion plan approved by the West German government Wednesday after months of pressure from the United States and other industrialized nations to boost domestic spending. The plan has been criticized by diplomats, economists and businessmen as inadequate.

Baker Praises Actions

In Washington, Treasury Secretary James A. Baker III praised the European actions, saying the moves represented an important contribution to world efforts to coordinate economic policies.

Within 45 minutes of the Bundesbank's announcement, the dollar climbed 1 1/2 pfennigs to 1.66 marks. In New York, the dollar was at 1.6605 marks, up from 1.6455 Wednesday. The British pound was quoted at $1.8155, down from around $1.8200, on European markets.

But the moves failed to impress Wall Street. The Dow Jones industrial average declined 41.61 by 1 p.m. On the broader market, about five stocks fell in value for every one that rose on the New York Stock Exchange.

"Everyone was waiting for these worldwide interest rate cuts, and now that it's an accomplished fact, the market doesn't give a darn," noted Michael Metz, a technical analyst for Oppenheimer & Co.

The British government said its move to trigger the rate cut was made in concert with rate reductions in West Germany and France.

'Spirit of Cooperation'

The cuts "reflected a spirit of cooperation needed for any future Group of Seven economic agreement," the Treasury said in a statement.

In Paris, the Bank of France cut two key money market rates by a quarter of a point.

France's Finance Ministry said in a statement that it was "pleased with this new sign of very close cooperation" between French and West German monetary policy in the framework of the European Monetary System.

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