Germany's central bank, long vilified around the world for sacrificing global economic growth on the altar of a strong and stable German currency, has emerged as something of a reluctant hero for modestly trimming German interest rates.
Almost everywhere, the Bundesbank--as Germany's fiercely independent central bank is known--won praise for looking beyond the threat of inflation at home. Granted, some analysts questioned whether the small rate cut would provide a sizable economic jolt.
Nonetheless, the Bundesbank's action was widely seen as a constructive response to the needs of a sagging global economy and to the pressures generated by Europe's increasingly unstable currencies.
"It could be the dawn of a new age for the Bundesbank," said David Brown, a researcher for Swiss Bank Corp. in London. "It has begun to look at German
monetary policy in the international context, and to take seriously its international responsibilities."
But the Bundesbank has come under heavy fire at home, where it was castigated for jeopardizing the deutsche mark in response to political pressure. German critics said lower rates--and the economic lift they provide at the cost of inflationary pressure--were sought by Chancellor Helmut Kohl and by foreign governments.
The mass circulation daily Die Welt called Monday "a black day for the Bundesbank."
Bundesbank President Helmut Schlesinger, the silver-haired personification of Germany's determination to maintain a strong mark, insisted that the interest rate reduction was made on its own merits. "It is a mistake to believe that we were forced to cut interest rates," he asserted.
That may be literally true. But in fact, analysts agreed, the Bundesbank decision to reduce rates for the first time in five years was dictated by two developments outside its direct control: Italy's foundering lira and Germany's own flabby domestic economy.
The lira was the trigger. Like the European Community's other central banks, the Bundesbank is obliged to rescue EC currencies that fall from their prescribed values in Europe's system of fixed exchange rates.
That forced the Bundesbank last week to buy about $17 billion worth of lira on international currency markets--a pace that even the mighty Bundesbank could not sustain. It was only when Italy agreed to devalue the lira by 7% that the Bundesbank approved small cuts of 0.25% and 0.5% in the interest rates it charges to commercial banks.
Brendan Brown, head of research for Mitsubishi Finance International in London, said the Bundesbank was prepared to cut more in return for an overall realignment of European currency values. But when Great Britain and Spain refused to devalue the pound and the peseta, Brown said, the Bundesbank made only a "minimal response."
As for Germany's economy, buffeted by the enormous cost of reunification with the former communist East Germany, analysts said the Bundesbank had begun to realize that the prospects of recession had mounted and that the threat of inflation had subsided.
"The Bundesbank would never say it this way, but the weaker economy dictated lower rates," said Klaus Friedrich, chief economist for Dresdner Bank in Frankfurt, Germany's financial center.
And lower rates in Germany will relieve the pressure on other European countries to protect their currencies with rates so high that they stifle economic growth.
Friedrich, for one, called the Bundesbank's action "responsible," in keeping with German obligations as Europe's economic powerhouse. "If Europe is to be taken seriously," he said, "the Bundesbank has got to take its European obligations seriously. It can't look only within Germany" to determine what its policies should be.
Swiss Bank's David Brown hailed the Bundesbank's action as a preview of what to expect from a European central bank, which under current EC plans is supposed to begin setting policy for a single EC currency in 1999.
Other analysts reached the opposite conclusion. Gerhard Sunderdiek of Bank of America in Frankfurt warned that the result could be a weaker mark and higher inflation. "The Bundesbank has lost ground," he argued. "Pressure has been shown to work, and so it will be used again."
That sentiment was widely echoed in the German press.
The financial daily Handelsblatt warned that if the Bundesbank came under suspicion of yielding to political pressure, "it would damage the bank's reputation for maintaining stable policies and its credibility, which in the past have been above reproach."
The Frankfurter Rundschau, going against the trend, reminded its readers of the workers who might lose their jobs if the Bundesbank had let high interest rates hamstring the German economy. "The Bundesbank deserves praise," it said.
Schlesinger, the Bundesbank's president, acknowledged that circumstances beyond the bank's control--a "foreign exchange trap" stemming from the Bundesbank's obligation to support the Italian lira--had forced its hand.
This was not the first time the Bundesbank cut interest rates to relieve pressure to support weak European currencies, Schlesinger said. It used the same strategy to engineer the last general revaluation of European currencies in 1987.
Schlesinger is more accustomed to being castigated as inflexible. It was also in 1987 that James A. Baker III, then President Ronald Reagan's Treasury secretary, placed the blame for the October stock market crash on the "obstinate monetarism of the little clique headed by Helmut Schlesinger."
The Bundesbank, like the Federal Reserve in the United States, is independent of the government. The Bundesbank's president is appointed to a fixed term by Germany's president, just as the U.S. President chooses the Federal Reserve's chief.
Neither bank president formally owes allegiance to the government. But unlike the Fed, which has a well-developed reputation for reducing interest rates when incumbent presidents seek a political boost from a more robust economy, the Bundesbank has jealously protected its independence.
By law, the Bundesbank's first responsibilities are to safeguard the mark and maintain stable prices.
Times researcher Reane Oppl contributed to this story from Bonn.