The decision followed gloomy accounts from government and industry leaders of the harshness of the recession afflicting Germany.
But Helmut Schlesinger, the Bundesbank president, made it clear that worries about the stability of the mark and the continued strength of inflation meant that there was no option but to continue the policy of cautious, small steps.
'Conditions simply do not allow any forcing of the pace. Having tested the market climate in recent weeks by moving money rates down, we summoned the courage to take the step on leading rates,' he said.
Theo Waigel, the finance minister, said that the rate cuts would 'help restore economic dynamism in Germany'.
On Wednesday, Gunter Rexrodt, the economics minister, had said that western Germany was in deep recession and did not rule out the economy shrinking by 2 per cent in 1993.
Justifying yesterday's rate cuts, Mr Schlesinger dismissed market worries about the higher-than-expected March increase in M3 money supply, which grew at an annualised 3.2 per cent.
He said that money supply growth was fully in line with the Bundesbank's medium-term goal of reducing the rate of inflation to about 2 per cent. After the strong money supply expansion of late last year, it was only natural that this should be followed by vacillation and correction, he said.
But some economists believed that the Bundesbank was playing down the M3 growth because of the intense domestic pressure to pursue interest rate cuts, even though the economic fundamentals were less than encouraging.
'They cannot be happy with the strength of M3 expansion. Taken together with persistent high inflation, it gives the Bundesbank little scope for anything other than small, step- by-step cuts. The sharp rate drop seen in previous recessions cannot be repeated,' said Dietrich Beier, chief economist at Berliner Bank.
Otmar Issing, the Bundesbank's chief economist, underlined the bank's concern about the rapid increase in public borrowing. Mr Waigel conceded on Wednesday that the federal cash position had worsened dramatically because of the recession. Borrowing would exceed DM65bn this year, DM15bn higher than previous estimates.
'With tax revenues likely to be lower than expected, the large deficit will place a heavy burden on the capital markets, and threatens to get in the way of the Bundesbank's hopes of seeing further declines in long-term interest rates,' said Hermann Remsperger, chief economist at BHF bank.