Germans Hold the Line on Interest Rates

NEITHER political pressure from President Bush nor this week's drop in United States interest rates is enough to convince the Germans that they should also lower their rates. Bonn and the German central bank, the Bundesbank, are holding firm to the position that their ``strong, booming economy'' necessitates a policy of comparatively higher rates, according to a Bundesbank spokesman.

Rather than being concerned over the widening gap between US and German interest rates, the Germans see the US drop in rates as positive because the effect was to push the dollar down as well.

The dollar had been rapidly gaining strength of late, raising German fears of higher prices for imports, the Bundesbank spokesman said.

Other than the sinking dollar, the US move does little to change global economic relationships, say German economists.

``All it means is that the United States is less of an attractive market to foreign investors - which it has been for a long time,'' says Peter Pietsch, an economist at Commerzbank AG in Frankfurt.

The US put considerable pressure on Germany and Japan to lower interest rates at this week's Washington meeting of the Group of Seven - which also includes France, Britain, Italy, and Canada.

The US maintained that lower interest rates were needed to stimulate investment in a sagging global economy, especially in Europe and the US. It also argued that Eastern Europe, the Soviet Union, and the Mideast - which have a tremendous need for capital - would be in danger if they could not borrow at more affordable, lower interest rates.

These arguments don't hold much water here. Germany is doing more than its fair share by making 25 billion marks ($14.6 billion) available for Eastern Europe and the Soviet Union, says Theo Waigel, finance minister in Bonn.

The Bundesbank argues, meanwhile, that Germany is helping stimulate the world economy by significantly increasing imports.

West German companies haven't been able to meet the demand for goods and services in east Germany on their own. This is why imports were up by 18 percent on an annual basis in the first two months of this year.

With the western German economy racing ahead (eastern Germany, in dire straits, still only accounts for about 10 percent of the country's gross national product) and a large-scale union wage increase of 6 to 7 percent on the horizon, the Bundesbank's chief worry is inflation.

This is why the Bundesbank says it has no choice but to hold to its restrictive monetary policy.