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Central Bank Raises Key Interest Rate

June 21, 1988

FRANKFURT, West Germany (AP) _ West Germany’s central bank Tuesday announced an increase in a key interest rate, sparking criticism that the move could worsen unemployment.

The securities repurchase rate, known as the ″repo rate,″ was increased from 3.25 percent to 3.5 percent.

A daily West German newspaper had reported last week that the Bundesbank decided to increase the rate, which it pays to trade securities in the open market. The rate had been unchanged since November.

Analysts said the central bank’s move didn’t constitute a sharp policy reversal. They said it was a reaction to several new economic trends, such as better global economic growth prospects, rising inflation, and the strong dollar.

″It was an adjustment to a changed environment,″ said Hermann Remsperger, chief economist at the Berliner Handels and Frankfurter Bank.

″The (3.25 percent) rate was created at a time when the world looked very differently from what it looks today,″ he said.

But an increase in borrowing costs can often lead to slower economic growth, some observers said. A leading member of West Germany’s Employees’ Union said the decision ″endangers economic growth and expansion of employment opportunities″ when joblessness is already about 8.4 percent.

″Since the government up to now has failed in developing a program for fighting unemployment, the responsibility for low economic growth must be tied to the monetary polities of the central bank,″ said Employees Union board member Ursula Konitzer.

In a news release, the Alliance of West German Labor Unions (DGB) also blasted the rate increase, saying the Bundesbank was using the higher dollar as an excuse to hike interest rates.

″Using this as justification to stop the danger of inflation is not convincing, because current price increases have been 1 percent for months,″ the DGB statement said.

The dollar was hardly affected by the news, remaining steady just below 1.7600 Deutsche marks, and West German bond prices firmed during Tuesday morning.

It isn’t clear yet whether the rate hike was a one-time move or the beginning of a string of interest rate hikes, said Remsperger. ″It will depend on the market reaction,″ he said.

But Ute Geipel, chief economist at Citibank AG, Citicorp’s Frankfurt subsidiary, said a further interest rate hike is only likely if the U.S. Federal Reserve pushes up its own rates.

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