W. German Interest Rate Hike Catches Wall St. Off Guard

The Bundesbank, West Germany’s central bank, said today it will raise its key discount rate to 4.5% from 4%, effective Friday. The surprise announcement’s effect was felt immediately on Wall Street and U.S. bond markets.

The central bank said it also pushed up the Lombard rate, another key lending rate, to 6.5% from 6%. It said the moves were aimed at slowing monetary growth. Strong rises in money supply tend to increase inflationary pressures.

The discount rate is the rate at which the central bank buys bills from banks, which influences other lending rates throughout the economy. The Lombard rate, which usually forms the ceiling for short-term money market funds, is the rate at which the Bundesbank lends to banks against securities pledged as collateral.

Stocks Fell

The move sent interest rates sharply higher on U.S. Treasury bonds and bills in the government securities market in New York. Higher rates overseas might force U.S. authorities to push up domestic rates. Wall Street stocks also fell on the news, with the Dow Jones industrial average down nearly 25 points in late-morning trading.

“The move reflected the fact that monetary growth currently remains stronger than can be tolerated from the point of view of monetary stability,” the central bank said in a statement.

The Bundesbank’s announcement, which followed a regular meeting of its policy-making central council, came as a surprise to financial markets.

Dealers had not expected West German interest rates to rise this week. Speculation about higher interest rates that surfaced earlier this year had subsided.

Economists had said a Bundesbank interest rate rise would unleash a spiral of world interest rate hikes and said domestic inflationary pressures did not warrant an immediate increase in key interest rates.

Bundesbank officials have stressed that the central bank had already started tightening monetary policy in the middle of last year in an attempt to counter inflation.

Austria also quickly followed the West German lead, matching its Lombard and discount rates.

The Bundesbank last pushed up the Lombard rate and the discount rate on Jan. 20 when the rises were also half a percentage point.

The dollar fell sharply on the news. Higher interest rates on mark investments will make the West German currency more attractive.

The U.S. currency fell below 1.85 marks from around 1.86 marks just before the Bundesbank’s announcement. West German stock and bond market prices also fell.