A GROWTH POLICY HAS THE BUNDESBANK IN A BIND
Having established its reputation as an inflation-fighter, the Bundesbank surprised many Europeans by unexpectedly lowering its discount rate by 50 basis points on Feb. 17, to 5.25%. The rate cut was welcome relief for the moribund economies of Germany and its neighbors, which immediately lowered their own rates a notch as well. But coming after nearly four months of inaction in the face of continued economic sluggishness, the timing of the move again raised the question that perplexed Europeans keep asking about the Bundesbank: "What does the Buba want?"
Most speeches by members of the Bundesbank policymaking council emphasize money-supply growth as the key factor determining Bundesbank interest rate policy, notes Goldman, Sachs & Co. Frankfurt economist Thomas Mayer. But with Germany's money supply growing strongly, these considerations don't explain the Bundesbank's latest move. Instead, Mayer found that, no matter what the Bundesbank says, it has been willing in the past to cut short-term rates in order to boost economic growth. That might explain why the Bundesbank took some 275 basis points off its discount rate in the last year, despite stubborn inflation during most of 1993.
Mayer sees the Buba cutting the discount rate by another 50 basis points by June. However, reducing interest rates to stimulate growth means that the Bundesbank will have a hard time bringing inflation down to its target of 2%, even with unemployment around 4 million. That means the Bundesbank will likely refrain from any additional rate cuts until well into 1995.EDITED BY MICHAEL J. MANDEL Christopher Farrell in New York Bill Javetski in Paris