Franc firms as Bank of France makes half-point rate cut

THE BANK of France yesterday cut its overnight rate by half a point, a further sign that it is placing greater priority on lowering rates than on protecting the value of the franc, writes Peter Torday.

The franc, nevertheless, firmed more than 1 centime to around Fr3.4900 to the mark after the fourth cut since the demise, in effect, of the exchange rate mechanism, which took the rate down to 8.25 per cent.

The US Federal Reserve stepped into the foreign currency markets to drive down the high-flying yen as a senior US Treasury official, Lawrence Summers, warned that the yen's rise could retard growth in Japan and elsewhere. Four rounds of intervention by the Fed forced down the Japanese currency by some 3.5 yen to Y104.90 to the dollar.

France is expected to announce further rate cuts in the days leading up to next Thursday's meeting of the Bundesbank central council, to take full advantage of any reduction in the key German discount rate.

But figures for German money supply yesterday brought little indication of early relief on the German interest rate front. In July, M3 money supply grew at an annual rate of 7.5 per cent, up from 7 per cent in June. The figures were at the low end of market expectations but did not include the impact of sales of marks during the recent ERM crisis. This is expected to inflate the money supply growth for August.