Frankfurt, Wednesday -- Germany's influential central bank said today

that the country's stubbornly high inflation rate meant it had to

maintain a cautious monetary policy to avoid triggering a rise in money

market interest rates.

Reflecting that caution, the Bundesbank initiated only a fractional

cut of just one basis point (0.01%) to 7.59% in the lowest rate at which

it offers funds to the banking system in its money market operations on

Wednesday.

Dealers said such a small cut signalled that any early lowering of

Germany's leading discount and Lombard interest rates was unlikely. The

next of the Bundesbank's regular

policy-making council meetings is scheduled for July 1.

But, despite the reference to caution on rate policies in its June

monthly report, the central bank took a more positive line on the

faltering German economy.

The situation had clearly worsened early in 1993, but the slowdown was

not intensifying and there were signs the economy might have stabilised,

it said.

''Despite the generally dim economic picture in west Germany there are

clear patches of light, which suggest the economy is not being

confronted by a cumulative downturn,'' it said.

Construction activity remained strong and there were signs that

exports were recovering, albeit from a very low level.

The appreciation of the mark which began late last year was one factor

hurting German exports, but the Bundesbank said it did not expect

competitiveness to be hurt long-term by this.

Lower wage deals this year meant prospects for a recovery from the

recessionary trends had improved, the report said.

The smaller rise in wage costs also gave hope for an easing in

inflationary pressures, though the rate of consumer price increases was

still too high, the report said.

''The inflation rate remains unsatisfactorily high,'' the report said.

But it added: ''The prospects for a weakening in price pressures have

improved, not leastly after this year's wage rises in west Germany came

out comparatively moderate.''

German annual inflation was at 4.2% in May, more than double the

Bundesbank's mid-term goal of 2%.

The report said caution on monetary policy was still necessary because

of large public deficits, which were pushing up German money supply due

to the government's high borrowing needs, and to concern about long-term

interest rates.

Long-term rates, important because they provide the key to investment,

had fallen in recent months but had not eased in response to latest cuts

in short-term credit costs.