German Rate Cuts?
Is the Bundesbank about to make deep cuts in interest rates to pull Germany out of a deepening recession? Its last grudging move--a quarter-point cut on Feb. 4 that brought the discount rate down to 8%--gave no hint that additional reductions were on the way. Indeed, some analysts expect rates to fall as little as 1.5 percentage points this year. But Deutsche Bank economist Ulrich Schrder notes that the central bank cut short-term rates 3.5 points during the recession of 1975 and 3.9 points in 1982's slump. In each case, Germany's slowdown was about as severe as it is today but with inflation running several percentage points above the current 3.8% level. "Experience should not be ignored," says Schroeder. "Once they begin to drop, rates usually fall rather quickly and quite substantially."
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