FRANKFURT, GERMANY, JAN. 31 -- Germany's powerful central bank shook financial markets today with an unexpected rise in key interest rates to their highest level since the early 1980s.
The Bundesbank's announcement, aimed at fighting domestic inflation as the costs of German unification mount, ran counter to advice from other countries fighting to stave off recession.
The dollar fell against the mark when the Bundesbank said it was raising its key discount lending rate half a percentage point to 6.5 percent and its Lombard emergency borrowing rate by the same amount to 9 percent.
Some economists said higher European rates could make it more difficult to lower rates in the United States.
"I am concerned this decision will not be completely understood, especially abroad," Bundesbank President Karl Otto Poehl said at a news conference after a regular meeting of the bank's policy-making council. "But this was a technical move needed to adjust to market rates."
Poehl urged Germany's foreign trading partners to understand the bank's top priority was to defend the mark.
He said the bank's monetary policy needed to prevent inflationary trends rather than react to them.
"If prices have already started to rise, then it is too late," he said.
High wage demands, huge government deficits and a planned tax increase would fuel inflationary pressures already emerging in Germany.
Financial markets had been expecting tighter monetary policies for a while, but not at a time of such strong international opposition to higher German interest rates.
Poehl said earlier that it would be difficult to raise rates because of the likely reaction from abroad.
Some other European central banks quickly followed the Bundesbank's lead.
The Dutch central bank raised each of its three key official rates by half a percentage point, and Austria's central bank said it would boost its discount rate and its Lombard borrowing rate by half a percentage point to 7 percent and 9 percent, respectively.
Italy and Belgium said they would not follow the Bundesbank's move immediately.
But British Prime Minister John Major said Britain would reduce interest rates when the time was right.