International Business : Bundesbank Lowers Two Key Lending Rates Half a Point : Economy: German central bank’s move triggers other cuts in Europe. Analysts had expected a smaller reduction.
The Bundesbank cut two key German lending rates by half a percentage point Wednesday, setting off a round of interest rate cutting elsewhere in Europe and triggering speculation that Germany’s all-important strategy of gradual monetary easing may soon come to an end.
Many analysts were surprised by the size of the reductions. Smaller cuts had been expected, in line with international central bank efforts to stabilize the U.S. dollar.
“The cut in rates is a help for the U.S. dollar, even without the activities of the Federal Reserve,” said Norbert Walter, chief economist for Deutsche Bank, referring to last week’s massive round of central bank intervention to support the dollar, led by the Federal Reserve Bank of New York and the Bundesbank. “I am pretty sure that the Americans will follow (with a corresponding interest rate increase) on May 17.”
The dollar started at 1.6641 to the mark, rose to 1.6810 during the day and closed at 1.6750.
The Bundesbank cut the German discount rate--the lowest rate on loans to commercial banks--to 4.5% from 5%, while the Lombard rate, which is the rate on emergency loans to banks unable to find money elsewhere, was cut to 6% from 6.5%.
Gradual reductions in German interest rates are widely seen as essential to overall economic recovery in Europe. But after Wednesday’s cuts, some Bundesbank watchers were saying that Germany’s central bankers have taken their rate-cutting policy as far as they can, until they have proof that German inflation is really under control.
“Further lowering of the discount rate likely will follow only after solid evidence that the Bundesbank’s strategy of slowing M3 growth by cutting interest rates has worked, and after inflation has declined further,” a group of economic analysts at Salomon Bros. International Ltd. predicted in a statement.
M3 is a measure of liquidity in a nation’s economy and is closely watched by German monetary analysts as an early indicator of inflationary pressure. Germany’s M3 money supply grew substantially faster than expected in the first months of this year--by more than 15% in March, compared to a Bundesbank target growth rate of 6%.
Bundesbank President Hans Tietmeyer said Wednesday that he hoped the generous interest rate reduction would encourage investors to take their money out of bank deposits--a component of M3--and put it into long-term paper assets. Such assets are not included in the M3 calculation and therefore do not put pressure on that particular measurement of the money supply.
“Today’s decision will help make investments in long-term securities more attractive,” Tietmeyer said, adding that the Bundesbank continues to view money supply control as “decisive.”
Tietmeyer said the Bundesbank believes that inflation is indeed under control and that the economy in Germany is improving. Inflation in Germany was running at 3.1% in April, down from 3.2% in March, and Bundesbank officials have predicted it will drop below 3% soon.
“The outlook for (economic) stability has continued to improve, and the deutsche mark is strong,” Tietmeyer said.
Italy, Austria, Belgium, Denmark and the Netherlands all reduced key interest rates after the Bundesbank’s move. The Bank of France reduced rates by cutting its key intervention rate, or the floor to French money market rates, to 5.5% from 5.6%.
