German easing sparks wave of shallow cuts

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The Independent Online
THE BUNDESBANK yesterday allowed German market rates to ease, sparking a fresh round of interest rate cuts in Europe.

Austria, Belgium, Denmark, Greece, the Netherlands, Norway and Sweden all cut official rates yesterday after markets were heartened by signs that the Bundesbank has firmly decided on a course of easing interest rates. Speculation mounted that Italy and Ireland would soon follow suit. Most countries announced reductions of a quarter point or less but Sweden cut rates by one full point and Norway by half a point.

There were strong indications, however, that the German central bank will take a cautious and gradual approach to monetary easing. As a result, the dollar lost 1.45 pfennigs to close at DM1.5045 in London. The fall in German market rates - to 8.75 per cent from 8.90 per cent - was less than the market expected. And Reimut Jochimsen, a Bundesbank council member, warned that the markets might be wrong to assume that interest rates could only go down.

'We will have to watch that falling interest rates don't have a negative impact on exchange rates,' he said. 'If we get pressure on the mark, they could go the other way.'

The latest fall in German market rates has brought the overall drop to a full percentage point in little over a month. German economists said the Bundesbank should be credited with having already created a decisive downward trend in rates.

'I do not know what some people abroad are still waiting for, because really what they seem to want has already happened,' said Peter Pietsch, a Commerzbank economist.

Whether the official Lombard rate, standing at 9.5 per cent, came down soon was not important, he added.

Deutsche Bank's Bundesbank watcher, Helmut Kaiser, expects the cautious step-by-step downward slide in money market rates to continue as far as 8.25 per cent by the end of the year. The room for manoeuvre that this creates will allow for a drop in official rates, but this will only be of symbolic value.

The reasons for the change of course by the Bundesbank are widely believed to lie in rapidly growing concern about the unexpected weakness of the domestic economy. On top of this, the recent appreciation of the mark gave the Bundesbank more flexibility to push rates down.

'It is quite clear that the Bundesbank has become much more worried of late about the state of the economy,' Mr Pietsch said. 'Also, the extent of the downturn has finally begun to work through into a falling away of credit expansion.'

The growth in German money supply in September, announced yesterday, was a less-than-expected 9.1 per cent following an 8.8 per cent expansion in August. The figures had little impact on the markets because the Bundesbank has begun to play down the importance of M3 figures in setting monetary policy.

France yesterday revealed that the German central bank lent it a small part of the Fr160bn ( pounds 20bn) total France used to support the franc during last month's speculative attack. At current exchange rates, France appears to have spent the equivalent of DM47bn defending the franc, of which the Bundesbank lent only a small portion. That compares with about DM33bn it advanced to Britain when the pound was driven out of the exchange rate mechanism.