German Central Bank Cuts Interest Rates : Europe: Reductions are considered essential to Continent’s economic recovery. Another cut is expected by end of year.

Against a backdrop of continued gloominess in Europe’s most important economy, central bankers surprised investors Thursday by cutting Germany’s leading interest rates, a move regarded as essential to economic recovery across the Continent.

Effective today, the Bundesbank reduced its discount rate--the cheapest rate on loans to commercial banks--to 5.75% from 6.25%. It also cut the Lombard rate--the rate on emergency loans to banks unable to find money elsewhere--to 6.75% from 7.25%.

The reductions continued a year-old policy by the independent central bank to incrementally trim rates in hopes of stimulating the sluggish German economy without sparking higher inflation. Many economists expect another reduction before the end of the year, particularly since the country’s 4% annual inflation rate appears to be in check.

“The rate decision is . . . tenable because the fight against inflation is showing gradual, clear signs of progress,” said Bundesbank President Hans Tietmeyer, who assumed his influential post this month.

Although the latest round of cuts came two weeks earlier than expected, it was not seen by analysts as a signal of a shift under Tietmeyer from the bank’s cautious stance.

“The timing was somewhat of a surprise, but they were due for a cut,” said Kit Juckes, an international economist at S. G. Warburg Securities in London. “Cutting rates at this stage in the recession-bound German economy does not mean they have gone soft on inflation by any stretch of the imagination.”

The announcement came as Chancellor Helmut Kohl complained in an economic address to Parliament that Germans had fallen behind their competitors and were losing their “enterprising spirit, vision and courage.” Kohl said the nation’s recession has officially bottomed out, but he warned that recovery will be slow because of massive structural problems.

According to a report this week from the economics ministry, leading indicators suggest the economy is stabilizing, with the growth of the money supply nearing the central bank’s target range and demand in the manufacturing sector improving slightly. The report cautioned, however, that for most Germans the picture has not improved.

“It seems like there is still nothing more important than thinking about how we can expand our recreation time,” Kohl scolded Germans in his nationally televised speech. “If we want to secure Germany’s future, we cannot organize our country like one big recreation park.”

But the lecture went unheeded in the industrial Ruhr Valley, where thousands of steelworkers walked off their jobs and blocked a highway to protest new legislation that restricts jobless benefits. The IG Metall trade union, the biggest in Germany, has threatened widespread strikes over the policy, which it says affects 10,000 of its members.

The government wants to cut unemployment and welfare benefits to help reduce the country’s budget deficit, a consequence of the huge cost of German unification. But Kohl insisted Thursday that the reductions account for only a fraction of public spending and do not constitute “an attack on the welfare state,” as his opponents have complained.