Germany Leads Europe Nations With Move to Stem Inflation

Germany’s central bank raised interest rates Thursday for the first time in more than five years, calling it a precautionary move against inflation. Central banks in France, the Netherlands and Denmark followed suit.

The German Bundesbank announced it was increasing its securities repurchase--or repo--rates through Oct. 22 to 3.3% from 3% to preempt higher inflation and curb growth in the money supply.

At the same time, the Bundesbank left unchanged its official discount rate at 2.5% and its Lombard rate at 4.5%.

Finance Minister Theo Waigel called the moves “an appropriate preventive measure” in view of the dollar’s appreciation against the mark since spring “and the subsequent rise in import prices.”

Import prices rose 5.4% in August, the biggest jump since 1989. Especially affected are commodities priced in dollars on the world market, such as petroleum products.

The dollar, which has been retreating since hitting an eight-year high of 1.891 marks on Aug. 6, hit a 15-week low by dipping below 1.7350 marks before trimming its losses to end at 1.7427 marks, down from 1.7487.

Waigel said the recent German economic upswing won’t be dampened by the Bundesbank’s rate hike. Rates on long-term capital loans to businesses, “which are vital to investment and employment,” are not expected to be affected, he said in a statement from Bonn.

Following the Bundesbank’s announcement, the Bank of France in Paris also raised its key intervention interest rates to 3.30% from a previous 3.10%.

In Amsterdam, the Dutch central bank increased its fixed advance rate to 2.75% from 2.5%, and in Copenhagen the Danish central bank raised its discount and repurchase rates 0.25% points to 3.50% and 3.75%.

The repo rate has become the German Bundesbank’s main instrument for influencing the money market. It is the rate the German central bank charges banks for buying back short-term securities when banks need cash for daily operations.

The repo rate last rose to an average 9.7% in August 1992 but had since declined to 3%, where it had remained since September 1996.

The last increase in either rate was in July 1992, when the discount rate was raised to 8.75% from 8%.