PARIS -- Germany's central bank, widely blamed for Europe's monetary chaos and deepening economic recession, went some way yesterday toward appeasing its many critics by lowering its two influential interest rates by half a percentage point each.
The Bundesbank cut its discount rate -- the lowest rate for loans to commercial banks -- to 6.25 percent, from 6.75 percent, and it lowered its Lombard rate, the rate for lending emergency funds to banks, to 7.25 percent, from 7.75 percent
Central banks in Belgium, Italy, Spain and Austria immediately followed the German lead by cutting their main interest rates. France left its key intervention rate, which acts as a floor on money market rates, unchanged at 6.75 percent but cut its five-to-10-day lending rate to 7.75 percent, from 10 percent
These reductions should help encourage a long-awaited European economic recovery, which is, however, not expected to materialize until next year.
After the rate cuts, the dollar tumbled to a three-month low against the mark in New York, as the German rate cuts failed to brighten investors' negative view of the dollar. "When the dollar didn't rally on the German cuts, people headed for the exits," said John Nelson, chief foreign exchange dealer at Barclays Bank.
The German central bank said the long-awaited cuts were justified by indications that inflationary pressure in Germany was easing. Concerns over inflation have been the main reason advanced by the Bundesbank for its reluctance to lower rates more quickly.
"There have recently been signs of a gradual easing of price increases," the bank said in a statement. Inflation has stabilized in recent months and was 4.2 percent in August -- still about double the Bundesbank's medium-term target.
The German rate cuts came six weeks after the Bundesbank precipitated the collapse of the European Monetary System by declining to reduce its discount rate, which effectively sets a floor for loan rates, ahead of its August vacation.
After its decision, the narrow bands under which European currencies had been allowed to fluctuate since 1979 were sharply relaxed and a 15 percent fluctuation margin introduced. In effect, European currencies are now floating.
High German rates, attracting investors to the mark, have placed an acute strain on European economies over the past year by obliging other central banks to apply rates competitive with the Bundesbank's. They have had to follow this policy at a time when many economists argued that a lingering European recession and soaring unemployment necessitated the sort of sharp rate cuts that helped the United States emerge from its last recession.
The German government, which has repeatedly countered appeals from the United States and its European neighbors for lower rates by pointing to the fact that the Bundesbank is an independent authority, welcomed the cut.
"The decision will help to strengthen resurgent powers in the economy that have already become more apparent," Economics Minister Guenter Rexrodt said in a statement.
Finance Minister Theo Waigel went further, suggesting that the Bundesbank was extending a hand to neighboring countries. "With this decision, the Bundesbank is supporting efforts to restore economic growth within and outside Germany," he said.
This week, the government said that the German gross domestic product grew five-tenths of a percent in the second quarter, the first growth since the first quarter of 1992. Because Germany is the world's third-largest economy and by far the largest in Europe, its recovery from the strains created by unification is regarded as essential to any wider resurgence of economic activity in Europe.
The discount and Lombard rates have now fallen a total of 2.5 percent since their peak in August 1992. But the reduction has been far slower than Germany's European Community partners had hoped.
Stock markets in France and Germany, which have soared to record levels in recent months on expectations of lower rates and of a European recovery next year, fell yesterday. Analysts said the German cuts had apparently been discounted. Moreover, they said, no further cuts are expected for some time.
In New York, the dollar fell by nearly 3 pfennigs, to 1.5940 marks, its lowest level since June 4, before recovering to close at 1.602 marks, down from 1.6150 marks Wednesday. The dollar has tumbled 8.5 percent against the mark since July 30, amid signs that poor economic growth will keep U.S. rates lower than German rates.
The dollar failed to rally on the German rate cut, in part because demand for marks is especially high, traders said. European central banks have been buying billions of marks to replenish reserves that they had spent defending their currencies during the European Community's currency crisis in July.