Bundesbank keeps rein on rates

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THE BUNDESBANK disappointed financial markets yesterday, leaving all its main interest rates unchanged and giving the impression that a significant further relaxation of monetary policy may fail to materialise, writes Peter Torday.

In London, the dollar closed more than a pfennig down at DM1.5456 and dropped more than a yen to Y98.99. Against the pound, the dollar fell half a cent to dollars 1.5445. The decline was also fuelled by a larger than expected US trade deficit of dollars 9.37bn ( pounds 6bn) in June, swollen by record oil imports and large rises in imports of industrial supplies, cars and capital goods. The deficit with Japan widened further.

Speculation persists that the Bundesbank will cut rates again, though some analysts now expect only a quarter-point reduction. Hopes are also fading that the repo rate will come down. Jouni Kokko, international economist at Warburg Securities, said: 'The decision reinforces the view that if we have (a cut) it will be technical rather than a genuine relaxation.'

The decision came despite a slight slowdown in money supply growth, with M3 expanding by an annualised 10.3 per cent in July.

German bund prices finished little changed but US Treasury bonds were shaken yesterday, falling more than half a point after fresh evidence of inflationary pressures. A Philadelphia Federal Reserve Bank index showed a sharp jump in consumer prices.