France leads second round of rate cuts: Analysts fear that further relief for Europe's recession may be slow in coming UK shares close at record

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The Independent Online
FRANCE yesterday led a second round of Continental European interest rate reductions, following the Bundesbank's unexpected move on Thursday. But analysts fear that further significant relief for Europe's recession may be slow in coming.

Speculation of a Budget-time fall in UK base rates persisted yesterday, helping to drive share prices to yet another closing record. The FT-SE 100 Index rose by 10.7 points to a closing peak of 3,199.0.

The Banque de France dropped its intervention rate, the main influence on market rates, by 30 basis points to 6.45 per cent, and lowered its emergency five-to-ten day lending rate, the ceiling on French market rates, by half a point to 7.25 per cent.

Denmark chopped its discount rate by half a point to 7.25 per cent, the Bank of Spain reduced the intervention rate by a quarter point to 9.25 per cent, and Ireland reduced its short-term facility rate by half a point to 7 per cent.

Yesterday's interest rate reductions followed cuts by most other Continental European countries on Thursday. The market is now unsure whether German monetary policy has become more aggressive, with steeper and quicker rate cuts to come, in view of the weakening German economy.

Stephen King, of James Capel, said: 'The risk of a double dip recession in Germany is now quite a strong possibility.'

As a result of the uncertainty over the Bundesbank's policy, some analysts expect a modest weakening of the mark to continue next week, especially against sterling and the dollar.

Yesterday, the pound edged 0.07 pfennigs lower to close at DM2.4685, while the dollar advanced by 1.7 pfennigs to finish at DM1.6765.

But the German currency is expected to lose less value against Continental currencies. A number of European central banks are still rebuilding their depleted currency reserves by buying marks, following the virtual collapse of the exchange rate mechanism in August.

Most analysts predict the Bundesbank will now wait until December before lowering its key discount rate again, cut earlier this week by half a point to 5.75 per cent. The reduction caught the markets off guard, however, and strengthened the view that the German central bank had become more worried about the weak German economy, with inflation now a receding threat.

Further confirmation of easing German inflation trends came yesterday with the steepest year-on- year decline in producer prices since September 1987. German wholesale prices dropped by 0.2 per cent in September and were 0.5 per cent below their levels a year earlier.

German economists said the figures indicated a fall in consumer price inflation to perhaps as low as 3.8 per cent in October, when official statistics are released next week. Otmar Issing, an influential Bundesbank director, said there was a good chance of inflation falling below 4 per cent, the September rate, by the year-end. Jim O'Neill, chief economist of Swiss Bank Corp, said: 'The real test of the market's attitude to the mark will be inflation. If the rate is 3.8 per cent, that will help the mark.'

Despite the widening of ERM bands, further falls in European interest rates, which could offer more relief for the Continental recession, are likely to depend on when the Bundesbank decides to cut rates again. The fact that most countries this week opted for a cautious easing of monetary policy suggests that France and other 'core' members of the ERM are continuing to behave as if their currencies were still linked to the mark inside narrow currency fluctuation bands.

David Cocker, of Chemical Bank, said: 'Apart from countries whose interest rates are much higher than Germany's, the willpower to cut interest rates again doesn't exist. France will probably be very reluctant to do anything to undermine exchange rate stability.'

Several ERM currencies yesterday strengthened against the mark, with the French franc climbing more than two centimes to Fr3.4884 to the mark.

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