Europeans Cut Interest Rates to Help Dollar

Central banks across Western Europe lowered interest rates Thursday in a coordinated attempt to slow the slide of the dollar, but economists here believe that the move will have only a short-term effect.

In the course of the day, the West German Bundesbank, the Bank of England and the central banks of France, Austria, Switzerland, Belgium and the Netherlands all lowered their base lending rates by between half a percentage point and a full point.

In theory, the move should stimulate economic growth in the countries involved, help counter a global slowdown and provide opportunities for American exports, thus easing the U.S. trade deficit. The reality is less clear-cut.

Dollar’s Slide Steadied

The reduced interest rates immediately steadied the dollar’s slide on European foreign exchanges, and at the close of trading here, the dollar was up marginally against the deutschemark and up by more than a half a cent against the pound.

In recent weeks, the dollar has declined steadily against major currencies, and on Tuesday acceleration was prevented only through interventions by several central banks.

The interest rate cuts were hailed by the Reagan Administration, which has been demanding for months that West Germany make further efforts to help stimulate Europe’s lagging economy.

Treasury Secretary James A. Baker III said he “is delighted with the announcement by the German Bundesbank and other European central banks to cut interest rates.” He said that the interest cuts, together with measures announced Wednesday by the German government to spur domestic spending, “should help to strengthen growth in Europe and reduce trade imbalances.”

Treasury Officials Puzzled

But Treasury officials acknowledged that they were puzzled and disappointed by financial market reaction to the European moves. Although the dollar moved up against nearly all foreign currencies, the coordinated rate cuts failed to dent the bearish mood on Wall Street, where the Dow Jones average of 30 industrial stocks tumbled 72.44 to 1,776.53, a decline of 3.92%.

“This a record postwar low for the German discount rate,” one Treasury official said. “What more do they want?”

Market analysts in New York said that stock traders had been expecting lower European interest rates and were focusing more on negative economic factors such as Thursday’s disappointing November sales reports from large general retailers and the continuing uncertainty about congressional efforts to cut the federal budget deficit.

Hugh Johnson, a senior vice president and stock analyst at First Albany Corp., told the Associated Press that while there was no clear-cut reason for Thursday’s sell-off, some investors were disappointed that the dollar did not rally even more.

Disappointing Retail Sales

Peter Vandenberg, a vice president and trader for Shearson Lehman Brothers Inc., said the market was hurt by the November retail sales figures and by traditional year-end tax-related selling.

Britain’s chancellor of the exchequer, Nigel Lawson, said the coordinated interest rate reductions had followed close consultation among Britain, West Germany and France.

“This has been a very welcome sign for a high degree of cooperation,” Lawson said in a broadcast interview.

But in the same interview, Lawson said he would not advocate a meeting of the seven democratic industrial powers, the so-called Group of Seven, or G-7, to discuss further global economic cooperation until Washington agrees to contribute to stabilization of the dollar.

All Must Contribute

“The key is if everyone agrees to contribute to stabilizing the dollar,” Lawson said. “If there is no commitment--and this applies particularly to the United States--I see little point in holding a G-7 meeting at all.”

The most important part of Thursday’s action took place in Frankfurt, where the West German Bundesbank reduced its discount rate by half a percentage point, to 2.5%, a record low level.

The decision apparently was made only after a long internal debate and a marathon meeting Thursday of the bank’s council. It countered, at least in part, the disappointment that greeted the modest economic pump-priming package that the Germans unveiled Wednesday in Bonn.

Dismissed as Inadequate

The Bonn program, meant to reassure global markets that Western Europe’s largest economy was prepared to expand, was dismissed as inadequate by many people, among them Otto Lambsdorf, a former West German economics minister. It offered $12.7 billion in new, low-interest loans to small businesses and local governments, but little more.

U.S. policy-makers maintain that a global economic slowdown and major trade imbalances can best be countered by economic expansion in West Germany and Japan, the world’s two strongest economies.

But the West Germans have consistently resisted taking on the role of economic “locomotive,” in part because of the inflation fears that linger from the 1920s.

Many observers believe that Thursday’s move by the Bundesbank reflects the intensity of pressure on the West Germans by other Western governments as well as its huge export sector, which has been forced to compete in world markets with a steadily weaker dollar.

Tax Cut May Be Blunted

Bonn is scheduled to implement a long-planned $8-billion tax cut in January, but many economists believe its impact may be blunted because it is aimed mainly at people in the higher-income brackets. Some have called for accelerating additional tax cuts that are scheduled for 1990.

Although Thursday’s rate reductions were widely welcomed in European financial circles, there was little euphoria.

“In the short term, we’re encouraged because the Germans seem finally willing to do something for exchange rate stability,” said Anthony Thomas, an international economist with Kleinwort, Grieveson Ltd., a London brokerage house. “But in the long term, it’s the size of the U.S. deficits that will determine the dollar’s fate.”

‘A Token Measure’

Nigel Randell, an economist at the London securities firm of James Capel & Co., echoed these sentiments, saying: “This is a token measure; it won’t have a major impact. We’re still looking for a further fall in the dollar over the next 12 months.”

Much of the concern here stems from doubt about the effectiveness of the $75-billion budget cut agreed to last month by President Reagan and members of Congress.

Reports that the White House is pressing the Senate Finance Committee to drop more than $10 billion from proposed tax increases that make up part of that package have fueled the skepticism.

“We’re waiting for the fine print on the deficit deal, but we’re expecting to be disappointed,” Thomas said.

Equity markets in Europe reflected this gloomy long-term prognosis.

Prices on the London Stock Exchange, Europe’s largest, rose 21 points in a brief rally that followed announcement of the lower interest rates, but then fell back and closed down 1.9 points.

Times staff writer Tom Redburn in Washington contributed to this story.