The Buba Backs The Status Quo...For Now

In its first meeting after the summer recess, Germany's Bundesbank decided on Aug. 10 to leave interest rates unchanged. So for the financial markets and the 3.6 million unemployed Germans, the question remains: How long will the Buba be able to defend the status quo?

Perhaps not very long. The latest economic data for June looked weak, in part because of a slew of holidays that depressed industrial activity, retail sales, machinery orders, and auto output. Moreover, Germany is switching to new data-collection methods that are skewing seasonal adjustments and delaying some reports. But the Buba's Aug. 15 economic report said that, data problems aside, the recovery continues, helped by rising domestic demand.

By its Sept. 7 meeting, the Buba will have the first- and second-quarter reports on gross domestic product. Expectations are that real GDP grew at an annual rate of between 2% and 2.5% in the first half of 1995, following a growth rate of 2.3% in 1994. That pace may be mild enough for a cut in the discount rate, which was last trimmed on Mar. 30, to 4%.

The Buba's hesitancy may come from the mixed news on inflation. Consumer prices rose 2.3% in the year ended in July, down from 2.4% in June (chart). June import prices fell 0.2% and were unchanged from a year ago. And an important inflation gauge, the M3 money supply, is hardly growing.

But producer price inflation rose to a three-year high of 2% in June. And the currency has weakened of late: Thanks to intervention by the major central banks, the mark traded at only 1.476 to the U.S. dollar on Aug. 15--a six-month low. The cheaper mark, while good for Germany's export outlook, may lift import prices.

The Buba is sure to ease gradually. In early August, the bank began to allow its securities repurchasing rate to slip. The rate was 4.45% on Aug. 16. That move suggests that, in the absence of price pressures but with 9.2% of Germans unemployed, the central bank is paving the way for another rate cut by the fall.