German Central Bank Cuts Interest Rate, Markets React Positively

The German central bank continued its trend of reducing interest rates, allowing another drop in the securities repurchase rate to 5.80 per cent from 5.88 per cent last week. This decision triggered a rally in the country's financial markets, with the 30-share DAX index opening 20.87 points or nearly 1 per cent higher at 2,162.21, and eventually finishing the day at 2,161.13, up 19.79 points.

The Bundesbank's rate cut was also influenced by the decline in German consumer inflation in March, which was reported at 3.1 per cent over the previous year, a decrease from February's 3.2 per cent. This decrease is expected to continue, with economists predicting that overall west German inflation will drop to 3.2 per cent from March, 1993, for the lowest annual rate since May, 1991.

However, the markets' optimism was tempered by concerns about money supply growth, which is a key factor in the Bundesbank's rate decisions. Despite the initial rally, bond prices ultimately steadied as the market began to worry about German money supply figures.

Key Takeaways:

• The German central bank lowered the securities repurchase rate to 5.80 per cent from 5.88 per cent last week, as part of a trend of gradually pushing this important interest rate lower.
• The DAX index opened 20.87 points or nearly 1 per cent higher at 2,162.21, and finished the day at 2,161.13, up 19.79 points.
• North-Rhine Westphalia, the first of the big four German states to detail inflation to mid-March, reported a decline in its rate, with consumer prices rising 3.1 per cent over the previous year in March.
• Economists predict lower labour costs will allow overall west German inflation to drop to 3.2 per cent from March, 1993, for the lowest annual rate since May, 1991.
• The Bundesbank's decision was influenced by concerns about money supply growth, which is a key factor in the bank's rate decisions.
• The Bundesbank had held the "repo" rate steady at 6 per cent from December, but has let it ease slowly to its current level in small steps this month.

Statistics:

• The securities repurchase rate was lowered to 5.80 per cent from 5.88 per cent last week.
• The DAX index opened 20.87 points higher at 2,162.21, and finished the day at 2,161.13, up 19.79 points.
• Consumer prices rose 3.1 per cent over the previous year in March, a decrease from February's 3.2 per cent.
• Economists predict overall west German inflation will drop to 3.2 per cent from March, 1993, for the lowest annual rate since May, 1991.
• The Bundesbank's 5.25-per-cent discount rate is expected to be reduced next month, allowing the repo rate to continue falling.

Sources:

• Reuters News Agency
• Frankfurt WEST GERMANY
• The German central bank