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Bundesbank Cuts 2 Key Interest Rates : Germany: Action comes as a surprise to financial markets and is aimed at delivering a jolt to the country's slipping economy.

April 23, 1993|From Reuters

FRANKFURT, Germany — The central bank surprised financial markets Thursday by cutting two key interest rates, trying to give the recession-battered German economy a boost.

The Bundesbank said it is lowering its Lombard emergency lending rate to 8.5% from 9% today and its influential discount rate to 7.25% from 7.5%.

Bundesbank President Helmut Schlesinger described the move as a small step and a continuation of the bank's policy of cautious interest rate cuts, which have coincided with a sharp deterioration of the German economy.

Economists and market dealers had been generally expecting no cut in interest rates or at best a small, symbolic trimming of the Lombard rate, which usually forms the ceiling to money market rates and is less important in times of easing credit.

The Bundesbank rate cuts, the second round in a month, were welcomed by the Bonn government. Economics Minister Guenter Rexrodt said the cuts "will help to improve conditions for economic growth in Germany and other (European) nations."

Finance Minister Theo Waigel said the Bundesbank's decision will help restore economic dynamism in Germany.

The interest rate announcement came after days of dire news about the economic trend in the western part of Germany. Rexrodt had given a grim account to visitors to the Hanover trade fair.

"We are in a deep recession. No one can seriously say how deep it is or how long it will last," he said on Wednesday. He could not rule out the economy shrinking 2% this year.

Schlesinger, at a news conference, described capital market interest rates in Germany now as extraordinarily low and said they are no longer any impediment to investment in Germany.

By cutting interest rates, the Bundesbank is not moving away from its policies of price stability.

Although inflation is still running clearly above 4% in Germany, the Bundesbank believes the latest money supply developments do not endanger the central bank's medium-term goal of bringing inflation back to 2%.

The money supply jumped a surprising 3.2% in March, but Schlesinger said this was more a return to normal after a period of contracting or stagnating money supply.

Schlesinger said the Bundesbank's decision will make things easier on the monetary policy front for some of Germany's European neighbors, but he made clear that interest rate moves elsewhere do not purely depend on the Bundesbank.

On German financial markets, shares and bonds rose on the rate-cut news, and the mark fell to a record low against Japan's yen.

Belgium, the Netherlands and Austria quickly followed the Bundesbank in lowering rates.

The Belgian central bank cut its central rate to 7.7% from 7.9% but left the discount rate steady.

The Dutch central bank cut its advances rate to 7.7% from 7.9% but left other rates unchanged.

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