Bundesbank leaves rates unchanged

PAUL WALLACE

Economics Editor

The Bundesbank left interest rates unchanged at its council meeting yesterday, but cut banks' minimum reserve requirements to make them more competitive with European rivals.

Earlier in the day hopes had been raised that the German central bank might follow the lead set by the Swiss National Bank, which cut its discount rate by half a percentage point to 2.5 per cent. In the event, the Bundesbank kept its key rates unchanged, with the discount rate left at 4 per cent.

The Bundesbank cut minimum reserve requirements quite sharply. While the reserve ratio on time deposits was left unchanged at 2 per cent, it was cut from 5 to 2 per cent on sight deposits and from 2 to 1.5 per cent on savings deposits. However, banks will no longer be able to count cash balances against the reserve requirements.

The net effect of the changes, which come into effect on 1 August, is to reduce the reserve requirements by DM7bn. The Bundesbank will drain this boost to liquidity by operations in the repo market.

The Bundesbank's move was "designed to enhance German banks' competitive position", said Richard Reid, economist at UBS in Frankfurt. Reserve requirements are lower in many other European countries, particularly the UK. "They are seeking to bridge the gap with other central banks," he added.

The Bundesbank's decision to leave interest rates unchanged did not come as a surprise after June's disappointing figures for consumer prices. These showed inflation rising from 2.2 per cent in May to 2.4 per cent. However, an early cut in rates is still widely expected after the holiday recess.