Pact may lead Bundesbank to cut rates


BONN, Germany -- Germany's political leaders reached a "solidarity pact" over the weekend, seeking to resolve questions of how to divide the huge financial burden of rebuilding eastern Germany. But the agreement's most immediate effect may be to open the way for the Bundesbank to lower interest rates to try to bolster the flagging economy.

Many analysts expect two important rates to be lowered Thursday at a meeting of the policy council of the Bundesbank, Germany's powerful central bank.

The Bundesbank had been pressing Chancellor Helmut Kohl's government for months to come up with a comprehensive plan to pay for rebuilding the formerly Communist eastern part of the country. The task is expected to cost $62.5 billion a year for the next 10 years.

The central bank said in the past that it was keeping interest rateshigh because of its concerns about the high costs of unification. But with Germany's economy in a deepening recession, the Bundesbank has recently been carefully guiding rates lower. That trend may be accelerated by the solidarity pact, government officials and private economists said.

"We have achieved a result that will enable us to meet the challenges facing us in eastern Germany," Mr. Kohl said at a news conference Saturday. The agreement is a package of tax increases and spending cuts, as well as higher subsidies and expanded credit for eastern Germany.

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