Even as Germany's recovery begins, the Bundesbank is suggesting another cut in interest rates isn't out of the question. Moreover, these hints come just as other central banks are tightening monetary policy, with the latest hike made by the Bank of England on Sept. 12.

The recent gross domestic product data clearly show that western Germany--90% of the pan-German economy--is on the mend. Second-quarter GDP rose at an annual rate of 1% from the first quarter and 2.3% from a year ago. Most of last quarter's growth came from exports and inventory accumulation. Indeed, in the past year exports have surged 9.2%.

Despite healthy GDP growth, Buba policymakers have left the door open for another cut in the discount rate, now at 4.5%, probably after the Oct. 16 federal elections. Council members Otmar Issing and Hans-Juergen Krupp indicated that as long as inflation continues to slow toward the Buba's target of 2% annually, a rate cut cannot be ruled out. And in a recent newspaper interview, Buba President Hans Tietmeyer stated "never say never" to lower rates.

The Buba's latitude reflects the stellar performance in inflation. Even with a jump in energy and coffee prices, consumer prices rose a mere 0.1% in August, or 3% from a year ago. That's lower than the 4% pace in August, 1993. And the key M3 money supply, up 9.8% in July, is starting to move slowly toward its target range of 4% to 6%.

Rates may have to come down, though, because domestic demand in the west remains weak. Consumer spending in the second quarter was hardly above its year-ago reading (chart). That likely caused last quarter's inventory buildup, a source of GDP growth that will not be repeated in coming quarters. And retail sales in July dropped 5% from a year ago.

True, the labor markets look better: The August jobless rate was down to 8.3%, from 8.4% in May. And the number of workers on short-time has fallen sharply. But because of wage concessions and past layoffs, second-quarter real disposable income is off 0.9% from a year ago. And Germans face a 7.5% income-tax surcharge in 1995. Improving consumer fundamentals will be the key goal of any rate cut by the Buba, since better household spending would allow Germany's recovery to pick up some homegrown strength.

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