Germany has room to cut rates, says OECD

A FAVOURABLE inflation outlook in Germany means the Bundesbank has room for further cuts in key interest rates to support economic recovery, according to the Organisation for Economic Co-operation and Development.

In its annual survey of the German economy, the OECD pointed to weak domestic consumption and reserves of excess productive capacity as helping to keep price pressures down.

The optimism on interest rates helped pushed the dollar higher against the mark on the foreign exchanges, although trade was relatively quiet with London closed for the bank holiday. By lunchtime in New York the dollar had pushed two pfennigs higher against the mark, topping the level reached before Italy and Sweden raised interest rates earlier in the month, although it fell back later in the day.

'Short-term interest rates should continue declining through 1994, bottoming out early 1995 at around 4.25 per cent,' the OECD said in its German report. Western German consumer price inflation was forecast as falling to 2.8 per cent this year and 1.5 per cent in 1995, from 4.2 per cent in 1993.

The OECD's call on the Bundesbank to ease further follows hard upon similar urgings from Alan Blinder, vice-chairman of the US Federal Reserve, who said European central banks must do far more to boost employment. However, with the German economy recovering more vigorously than expected, more and more economists are coming round to the view that the Bundesbank is near, or has already reached, the bottom of its rate reduction cycle.

Looking further ahead, the OECD spent much of its report urging Germany to move much more boldly to liberalise and de- regulate its markets to secure long- term growth prospects. Excessive costs and lagging innovation risk undermining Germany's respected 'social market economy' model, the OECD warned.

While praising Bonn's efforts to control public spending, and corporate Germany's successes at digging itself out of recession, the report predicted a rough patch as the country tackles structural handicaps. The state, in particular, is called upon to open up markets, encourage greater flexibility and a more innovation-friendly environment.

High-tech sectors such as office machines, computers, telecoms equipment and information technology are lagging in innovation, the OECD said.