West Germany, 2 Others Cut Their Discount Rates
Several foreign governments cut key credit charges Thursday, raising fresh hopes that the United States will enjoy a prolonged pattern of falling interest rates.
Financial analysts said the cuts by foreign central banks would allow the Federal Reserve Board to push credit costs lower here and provide a further boost to the economy.
The central bank of West Germany, the Deutsche Bundesbank, announced that it was reducing its discount rate--the charge on loans to commercial banks--to 3.5% from 4% effective today.
In Tokyo, reports on television and in the press said the Bank of Japan had decided to cut its discount rate for the second time this year. The reports were attributed to unidentified sources who said that Japan’s central bank governors would meet today to formally endorse the half-a-percentage-point reduction to 4%.
Attempt to Spur Growth
France and the Netherlands also announced that they were lowering their official rates.
Governments often adjust discount rates to influence economic activity, and lowering them usually is an attempt to spur growth.
But economists said the latest cuts were more likely to enable the Federal Reserve to lower credit costs in the United States without altering the relationships between interest rates around the world.
After the announcement from the Deutsche Bundesbank, many economists said they expected the Fed soon to cut the U.S. discount rate, which has stood at 7.5% since May.
Philip Braverman, chief economist for Irving Securities, said: “The Fed now has the leeway to make its own move. It could come as early as this weekend. There’s a high probability that they will cut before the month is out.”
Widespread Repercussions
As the only interest rate that the Fed directly controls, movements in the discount rate are seen as a signal of what the central bank wants rates charged throughout the economy to do.
Changes in the discount rate can have widespread repercussions. A cut could set off a chain reaction, perhaps encouraging banks to lower their prime lending rates and other borrowing charges, analysts said.
Interest rates have been retreating in the United States amid optimism about the inflation outlook due to the collapse in world oil prices. Home mortgage loans can be obtained with single-digit interest rates, and other borrowing costs have fallen to levels not seen since the late 1970s.
