The move came as the speed of Germany's plunge into recession was highlighted by figures showing unemployment in western Germany to be just a fraction short of the post-war high of 2.3 million. In Germany overall there are now nearly 3.5 million jobless.
The choice of a reduction in the rate at which it offers liquidity to the German banking system, just a day after the central bank decided to leave its internationally sensitive official rates unchanged, underlined the extreme cautiousness of the Bundesbank's approach, despite domestic and foreign pressure for sharp rate cuts.
Less than a week ago Germany faced calls from its Group of Seven partners for leading rate reductions. The rapidity of the collapse in economic activity in Germany has increased political and business pressure on the Bundesbank to offer relief from its tight monetary regime.
Johann Wilhelm Gaddum, a member of the central bank board, said yesterday's repo cut was 'certainly a signal for interest rates'. But he added that Germany's economic data spoke in favour of 'small interest rate moves'.
The overriding message from the Bundesbank is 'easy does it', according to Martin Hufner, chief economist with Bayerische Vereinsbank in Munich. 'If it were to make a dramatic move, long- term rates would rise, which must be avoided at all cost'.
The main factors underpinning the central bank's extreme caution are the persistence of high inflation, 4.3 per cent in February despite the recession, as well as the fact that the government in Bonn is still some way from turning its plans for controlling the chaotic public finances into effective measures.
The domestic pleas for mercy from Frankfurt's monetary clinch will be strengthened by the leap in western German unemployment to 2.29 million in February, or 8.3 per cent, just below the 2.3 million post-war high of 1985.
The jump in short-time work to 1.04 million in the west, from 857,000 in January, is a harbinger of worse to come. But such is the force of the decline in orders that more and more companies will be obliged to resort to lay-offs.
Facing fiercer competition, waves of German firms are moving production and sourcing to countries with lower labour costs, as well as seeking to introduce less labour-intensive production methods at home.
Economists said the recession would continue, adding 50,000 a month to the jobless total, pushing it to 2.5 million next year. 'I think it is the beginning of a structural shake-up in the labour market,' said Richard Reid, chief economist at UBS Phillips and Drew in Frankfurt.
In eastern Germany, propped up by widespread job creation and maintenance schemes, unemployment eased slightly by 10,000 to reach 1.2 million or 15 per cent.
However, government plans not to fund any new schemes in 1993 because of budgetary pressures are likely to produce a further jobless rise in the east as the massive shake-out in industry there continues.
The government expects the western German economy to shrink by around 1 per cent this year, while a growing number of economists now judge that a decline of anything up to 2 per cent is more realistic.
Speaking in Bonn during the parliamentary debate yesterday on the government's economic policy, the Economics Minister, Gunter Rexrodt, abandoned the official line of a pick-up in the second half of this year, saying merely that he 'still hoped things would improve'.Reuse content