German interest rates at new highs; European economies, exports by U.S. may be hurt.

LONDON -- The German central bank increased its key interest rates to postwar highs Thursday, sparking concern that more stress on the global economy would result in 1992.

The action was a blow to economies in Britain and France that are struggling with obstinate recessions, and it is potentially worrying to the United States, as well, economists said.

"If the German rise led to a chain reaction of increases across Europe, starting a new slowdown, then that could dim the outlook for currently strong U.S. exports," said Douglas Schindewolf, money market economist at Smith Barney, Harris Upham & Co.

Two Rates Rise

Germany's Bundesbank announced in Frankfurt an increase in the short-term money market financing rate, to 9.75%, from 9.25%. It is also raising its discount rate, to 8%, from 7.5%.

The Bundesbank last raised these key rates in August, when the discount rate went up a full percentage point.

The German central bank said the adjustments reflected its determination to adhere to tight monetary policies and to fight inflationary pressures.

German inflation is heading toward an annual rate of 5%, a level historically high for the nation. Wage increases are also escalating as the economy adjusts to the high cost of reconstructing the former East Germany, which is to require government expenditures of $70.5 billion next year.

In the wake of the Bundesbank action, the Dutch central bank increased its own key interest rates, including a 0.5% increase in its bank rate, to 8%. In Belgium, the discount rate was raised by the same margin, and Austria announced a similar increase.

American Express Bank economist Richard O'Brien said the German rate increases underlined the relatively downbeat economic outlook for the industrial nations in 1992, particularly for the debt-burdened consumer sectors in the United States and Britain.

The U.S. government must be worried that the rest of the world is also slowing down, he said.

"It's hard to see what economies are going to be the engines of growth - with the U.S. still stuck in recession, Japan slowing down, the Germany possibly facing the prospect of a sudden economic downturn because of tight money policies," Mr. O'Brien said.

The Trade Factor

Despite the German interest rate increases, Mr. O'Brien said, a further cut in the discount rate by the Federal Reserve is "inevitable," given the sluggish U.S. economy.

That could further depress the U.S. dollar against the mark in currency markets but thereby provide a longer-term stimulus to America by increasing its exports' competitiveness - as long as the European and Japanese economies don't slow significantly, he added.

Manufacturers Hanover Corp. economist Charles Lieberman warned that this potential slowdown abroad poses big danger to the United States.

"The U.S. is running a trade surplus with Europe and is pinning a lot of hopes in its trade sector," Mr. Lieberman said. "But exports to Europe show signs of slowing, so a German rate increase at this time is worrisome for its implications for cramping European growth."

On European currency markets, the dollar fell to 1.5590 against the mark, from the 1.5720 quoted before the rate increase.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER