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West Germany, Switzerland Cut Key Interest Rates

November 5, 1987

Undated (AP) _ West Germany’s central bank announced today it would cut a key interest rate by a half percentage point, in a coordinated attempt to help stabilize the U.S. dollar that helped spark a rally on Wall Street.

The Bundesbank cut its Lombard Rate to 4.5 percent from 5 percent effective Friday and was joined by the central bank of Switzerland, which lowered its key interest rates by a half percentage point.

French monetary authorities, in a move coordinated with the West Germans, increased their key money market interest rates to maintain stability between the franc and the deutsche mark within the European Monetary System.

European foreign exchange traders said the moves were seen as largely symbolic and had little immediate impact on the dollar, which had fallen to record lows early today against the Japanese, West German and Swiss currencies in Europe.

The Bundesbank also reduced its rate for securities repurchase agreements to a fixed 3.5 percent from 3.8 percent set two weeks ago.

The central bank’s hike in that rate from 3.6 percent in September had prompted harsh criticism from the Reagan administration, which has been pushing its major trade partners to use lower interest rates to stimulate their economies, and thus help reduce the massive U.S. trade deficit.

Worries over the inflationary implications of a weaker dollar have been cited as a key factor in the recent slump of world stock markets. In fact, some observers have linked Wall Street’s Oct. 19 collapse partly to fears the dollar would sink further following Reagan administration statements attacking the uptick in West German interest rates.

The European moves also came as several major U.S. banks cut their base lending rates to 8.75 percent from 9 percent to reflect a decline in open market interest rates in the United States.

It was the second time the major U.S. banks had cut their prime rate in two weeks, following a reduction to 9 percent from 9.25 percent on Oct. 22 in the wake of the stock market crash that sent investors stampeding to the bond market.

Stock prices on Wall Street, down in the two previous sessions, edged higher in early trading today following the rate cut announcements.

In cutting the Lombard Rate at a central bank council meeting today, the Bundesbank said the move was its contribution to the stabilization of the dollar-deutsche mark foreign exchange rate and the currency rates in the European Monetary System, according to an official press release.

But some analysts also noted the Bundesbank had not changed its discount rate, the main rate the central bank charged on loans to German banks.

The Lombard rate is a relatively little used interest rate charged by the West German central bank on loans to German banks.

The rate had recently been unusually high relative to the main rate charged by the Bundesbank on loans to its member banks, according to Robert Chandross, chief economist in the New York office of Lloyds Bank PLC.

″This could be interpreted as a largely symbolic measure that doesn’t have much significance,″ Chandross said.

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