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.
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