Tiny Cuts, Big Reaction : Bonn drops interest rates, and world markets soar

Germany’s stunning decision to cut interest rates--a relaxation of its relentless inflation fighting--got rave reviews around the world Monday. In addition to easing currency tensions in Europe and the United States, Bonn’s move could well prop up pro-treaty forces in Sunday’s pivotal referendum in France on the Maastricht Treaty, which represents the continent’s shift toward economic and political union.

French ratification of the treaty has been looking iffy, and the German interest rate cuts were a welcome boost for the treaty and French President Francois Mitterrand. The two reductions--a quarter of a percentage point in short-term bank loans and half a point in other loans--eased growing tensions in the European Monetary System, the framework for keeping order among Europe’s many currencies.

German rates--at the highest levels since World War II--were forcing other European countries to keep their rates up, hurting their economies and drying up demand for U.S. imports.

For some time now, the United States and other German allies have sought rate reductions--the last was in January, 1990--to help rejuvenate a moribund global economy. But as late as last week the Bundesbank, Germany’s central bank, was insisting that high domestic interest rates were necessary to fight the inflation that has accompanied the painfully costly process of German reunification.

However, the high rates were draining capital from other countries by attracting more and more of it to Germany, dragging the dollar down and pushing the mark too high. Germany’s change of heart was greeted with enthusiasm on world markets, especially on Wall Street. The dollar surged, stocks soared. All that happened over two tiny German interest rate reductions. What if Bonn were to drop rates a little further?