Board member Thilo Sarrazin has lost control of the bank's cash operations, but retains responsibility for risk control and information technology at the Bundesbank. The bank stated that it had "agreed on a basis of continued cooperation" with Sarrazin. The decisions have immediate effect.
The six-man board of the Bundesbank met on Tuesday to decide Sarrazin's fate after it was established that the legal hurdles to sacking him would be too great.
Sarrazin has since apologized for the remarks, but has denied repeated calls for his resignation. "What's said is said," he remarked.
A spokeswoman for the bank refused to comment further on the details of Tuesday's meeting, and declined to say whether part of the "basis for continued cooperation" included muzzling Sarrazin on sensitive issues in future interviews.
Instead, the bank attempted to use the latest decision to draw a line under the row. "Now we have to look forward and deal with the difficult tasks and challenges ahead," the spokeswoman said.
The restriction on Sarrazin's duties is being seen as both a warning and a punishment. According to experts familiar with the Bundesbank, Sarrazin's sphere of influence at the head of the bank will be significantly smaller.
"It is clear that his policy-shaping power will decline with the smaller remit," chief economist at DekaBank Ulrich Kater said. The move also extends the power of board member Hans Georg Fabritius, who inherits Sarrazin's cash operations powers.
Sarrazin caused outrage across the nation at the end of September when in an interview published in the journal Lettre International he questioned the will and ability of immigrants to contribute to Berlin's underachieving economy.
"I don't need to respect anyone who lives off the state, denies the state, doesn't do anything to educate their kids, and just produces more headscarf girls," he said, "That goes for 70 percent of the Turkish population and 90 percent of the Arab population in Berlin."
His words were condemned by both the Jewish and Muslim councils of Germany.
"I found his remarks absolutely unacceptable," the chairman of the German-Turkish business association Husnu Ozkanli told Deutsche Welle. "They smacked so much of racism. I felt really hurt when I read about his views."
Social scientist Christoph Scholast had an ambiguous position on Bundesbank's decision.
"Of course, political statements of that sort have never before been voiced publicly by a Bundesbank board member." Scholast told DW, "But it's difficult to say what the bank should or should not have done in response to Sarrazin's remarks. All the more so as he didn't make them in his capacity as a board member."
Broad agreement with Sarrazin
A survey published in mass-circulation paper Bild am Sonntag found that 51 percent of Germans largely agreed with Sarrazin, while just 39 percent disagreed, though most acknowledged that his language was inappropriate.
Sarrazin enjoyed a reputation for provocative statements during his tenure as finance minister for the city of Berlin. His latest remarks, however, have drawn greater attention and a state prosecutor's investigation for incitement.
"We must not accept such stigmatising and degrading comments," Kenan Kolat, chairman of the Turkish Community in Germany told DW. "I hope that prosecutors in Berlin will be able to initiate legal proceedings against Mr. Sarrazin on the charge of incitement. If his remarks don't count as incitement, then what use is a criminal code in Germany?"
Editor: Nancy Isenson