Bundesbank attacked on failure to cut rates

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DESPITE growing evidence of new frailty in the German economy, the Bundesbank left all key interest rates unchanged yesterday. The decision coincided with a virulent attack by the DIW economic research institute in Berlin on the central bank, whose continued reluctance to cut rates boldly was largely blamed for making the recession worse than necessary.

In an unusually grim forecast of economic prospects for the coming year, the DIW, one of Germany's six leading research institutes, said the economy in the west was heading for a double-dip recession. 'We have not been able to detect any signs of recovery,' said Heiner Flassbeck, the DIW director of research.

The Bundesbank held its discount and Lombard rates at 5.75 and 6.75 per cent respectively. It also left its repo money market intervention rate unchanged at 6 per cent for the next fortnight. The strength of the dollar, stubborn inflation and concern over the money supply have sharpened the Bundesbank's cautious instincts.

The result is interest rates that are far too high for the very precarious state of the German economy, Mr Flassbeck said. 'These policies are costing many jobs.'

According to the DIW, western German GDP would shrink by 0.5 per cent in both the fourth quarter of 1993 and the first quarter of 1994. Cuts in the federal budget this year, alongside tax and duty increases, will dampen private consumption, exacerbating the recession.

The only cure for the sluggish economy is to slash short-term interest rates to two points below long-term ones, Mr Flassbeck said.