German output leaps ahead: Bundesbank leaves rates unchanged as evidence of recovery grows

THE BUNDESBANK left its key interest rates unchanged yesterday as higher-than-expected output figures underlined further the gathering momentum of the German economic recovery.

The impressive 7.5 per cent year-on-year increase in western German industrial production in July was the second positive indicator recently. Labour market figures showed a big decline in seasonally adjusted unemployment.

While analysts remain divided over the possibility of a further cut in German interest rates, the strength of the recovery is swelling the camp of those who think the Bundesbank has reached the bottom of its easing cycle. 'They do not have any reason to do anything any more,' said Gerhard Grebe, of Bank Julius Bar.

'The industrial output confirms the growth trend which was already evident in the second quarter,' said Thomas Mayer, of Goldman Sachs. He expects key rates to stay unchanged until a rise in the first quarter of 1995.

Western German output was up 2.2 per cent in July from a month earlier, while June production was revised to 1.8 per cent up month-on-month. The economics ministry said the July figure would be revised downward, 'but even taking that into account the upward trend is continuing'.

The more reliable two-month comparison showed output rose 3 per cent in June and July from April and May. Compared with a year earlier, output increased by 5.2 per cent in June and July.

A sectoral breakdown showed the growth concentrated in the capital goods sector, boosted by strong domestic demand, and consumer goods, helped mainly by exports. Richard Reid, of UBS in Frankfurt, said the good output performance 'added to the impression the Bundesbank is not in a rush to cut rates'.

None the less, he is among those who still think another easing is on the cards, thanks to the improving inflation outlook.