Germany Cuts 2 Key Interest Rates; U.S. Praises Move : Economy: The move sends gold prices soaring. Traders remain unsure which of the global currencies is the safest.
Germany’s central bank announced a modest cut in interest rates Thursday--its fourth cut this year--just one day after President Clinton urged the European industrial giant to reduce rates for the sake of international economic growth.
The rate reductions--a quarter of a percentage point and half of a percentage point--also came less than a week before the economic summit in Tokyo of the world’s most powerful industrial nations. The move was applauded in Washington, where U.S. Treasury Secretary Lloyd Bentsen urged European nations to continue pressing for lower interest rates.
Bentsen said in a statement that “growing the world economy” will be among the major issues on the table during the July 7-9 summit. To stimulate growth, he said, the United States wants to see lower European rates and an effort by Japan to boost its economy.
Meanwhile, the German rate cut powered a surge in gold prices to a 2 1/2-year high. The August futures contract on New York’s Commodity Exchange jumped $9 to $388.20 an ounce.
Traders said gold rallied in part because the German rate cut adds a new element of uncertainty in currency markets, which have been exceedingly volatile lately. The dollar, which fell Thursday as the widely anticipated interest rate cut sparked waves of profit taking by dealers, has alternately soared and plummeted against major currencies this year, and there is no consensus on which nation deserves the strongest currency now, given the murky global economic outlook.
That uncertainty boosts gold because the metal has increasingly become viewed as a better store of value than any of the major currencies.
Also, traders said, the falling interest rates in Europe will make it cheaper to buy gold on credit, effectively allowing bullish investors and traders to make a bigger bet on the metal.
Specifically, the Bundesbank, as Germany’s central bank is known, reduced the discount rate to 6.75% from 7.25%. The discount rate is, in effect, the lowest available rate for short-term borrowing. The Bundesbank also nudged the Lombard rate, which acts as a ceiling on short-term borrowing, down to 8.25% from 8.5%
The Bundesbank’s action promptly triggered similar action in Denmark, Austria and Ireland. Switzerland and Sweden cut rates earlier Thursday, and France, the Netherlands and Belgium reduced rates last week.
High German rates have been blamed for retarding economic growth throughout Europe and beyond and for sparking a year of turmoil on European currency markets. However, analysts said the fiercely independent Bundesbank acted not in response to international pressure but in the conviction that waning inflationary pressure at home warranted lower interest rates.
Bundesbank President Helmut Schlesinger said the bank was satisfied that it could reduce rates without risking inflation and endangering the value of the German mark. The German government’s new deficit-reduction plan should help relax the inflationary pressures the Bundesbank has been fighting with high interest rates, he said.
At the same time, Schlesinger said, the latest economic data suggested that the German recession, perhaps the worst since World War II, might be reaching bottom.
Hans Jaeckel, senior economist at DRI-McGraw Hill’s Frankfurt office, said Thursday’s rate cut was amply justified by domestic economic conditions. Although inflation remains about 4% a year, he said, pressures for future inflation are waning, thanks in part to the German government’s announcement Tuesday of its plan to trim Germany’s budget deficit by about $13 billion.
“It’s a step in the right direction, but there will be many others,” said Brian Mullaney, senior economist at Morgan Stanley International in London. He predicted that short-term rates, which have already fallen about 1.5 percentage points this year, will come down as much as another 3 points before the end of the year.
Times staff writer Tom Petruno in Los Angeles contributed to this report.
