Bundesbank rules out German rate cuts

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FRANKFURT - With figures confirming that Germany is facing its worst economic crisis since the Second World War, Bundesbank central council members said yesterday the scope for interest rate cuts had disappeared, writes John Eisenhammer.

The western German economy shrank by 1 per cent in the first quarter and by 3 per cent compared with a year earlier, according to provisional figures released by the Economics Ministry yesterday.

The final figures will probably be even worse, according to Stefan Schneider, chief economist with Nomura Research in Frankfurt: 'We are expecting a drop of 1.5 per cent.' Many economists now forecast western German GDP for the whole of 1993 falling by 2 to 2.5 per cent.

Lothar Muller, a Bundesbank central council member, said that although Germany 'may be about to enter the worst recession in the country's history', there is no room for further interest rate cuts. Strong money-supply growth and a ballooning public deficit meant that rates had to stay high. Another central council member, Guntram Palm, said: 'The unsatisfactory development of prices and steep money-supply growth do not make further cuts in interest rates advisable at present. They are made even less so by the public deficits that cause us grave concern.'

Western German consumer prices rose 0.3 per cent in May from April and were up 4.2 per cent year-on-year, according to provisional figures from the Statistics Office.