Bundesbank resists European pressure for interest rate cuts: Concern over the mark will keep a rein on monetary policy, writes Peter Torday

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THE BUNDESBANK is understood to be resisting heavy pressure for an imminent cut in its key interest rates, despite the conviction in financial markets that key European interest rates will fall this week.

The prospect of another wave of European rate cuts was foreshadowed by recent reductions in Italy and Spain and may revive sentiment here for another cut in base rates.

The Bundesbank's current reluctance to reduce its rates any further - despite indications that money supply growth may have dropped last month inside the Bundesbank's 4.5 to 6.5 per cent target range - is based chiefly on concerns that the mark might be weakened. Easing money supply growth would signal that inflation pressures may at last be ebbing with the steep dive in Germany's economic activity.

But such considerations are thought to take second place to maintaining a strong mark, a key element of the Bundesbank's counter-inflation policy for decades.

There was confirmation last week that Hans Tietmeyer, the Bundesbank vice-president, will replace Helmut Schlesinger, the current president, in October and that Johann Wilhelm Gaddum, a hawkish member of the directorate known for his opposition to European Monetary Union, will become the new vice-president.

But the prospect of these changes is unlikely to alter the majority view on the Bundesbank council against cutting rates as long as the mark, which hit a 30-month low in the ERM, is in jeopardy.

However, Mr Tietmeyer is known to be more worried about the depth of the German recession than many others in the Bundesbank. He is likely to press hard for fresh reductions in rates if spending cuts are approved by the Bonn government next month and once worries about the mark's stability are calmed.

One potential factor in favour of eventual German rate cuts is the ephemeral strength of the dollar. Despite repeated predictions that the US currency would soar ahead this year, a significant bull market has failed to develop. If the dollar's moderate gains show signs of abating, the way will be open for German rate cuts.

This week, however, the Bundesbank is expected to confirm an unchanged 7.6 per cent securities repurchase rate. This would signal that key rates will stay the same - even though France is expected on Monday to chop its key intervention rate a quarter point, to 7 per cent. This would bring it below the Bundesbank's key discount rate, now 7.25 per cent.

However, French rates are already effectively below those in Germany. Late on Friday, three-month German money rates were quoted at 7.5 per cent, while the equivalent rates in France were quoted around 7.12 per cent.

Other ERM countries, according to analysts, are also poised to reduce their rates this week, including Belgium and the Netherlands.

French officials have begun to be openly critical about the Bundesbank's reluctance to cut rates. A sluggish world economic outlook is also likely to renew political pressure for lower German rates at the forthcoming EC and G7 Summits.

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