Germans ready to make 'symbolic' cut in key rate

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The Independent Online
THE Bundesbank is poised to cut its leading discount rate by a quarter-point to 6.5 per cent this week in what may be the last reduction before Hans Tietmeyer takes up the presidency in October from Helmut Schlesinger.

The reduction, below some predictions, is virtually symbolic as market rates are likely to be held steady. The German central bank is expected to fix the securities repurchase rate - the key influence on market rates - at an unchanged 6.8 per cent.

It believes that the widening of exchange rate mechanism bands gives it more room for manoeuvre and feels under no pressure to reduce its key rates. Traditionally, the bank prefers to set the discount rate at least a quarter-point below the securities repurchase rate. The two are level-pegging at present.

Even a symbolic cut could permit other countries to follow suit, but is unlikely to influence the outlook for rates in Britain, where the Government is resisting pressure for an early reduction. France is likely to persist in driving market rates lower, and Belgium is this week expected to announce the first cut in rates since last month's ERM crisis.

Sources said the Bundesbank council will endorse a reduction despite concern that it will draw criticism from other ERM countries, who may wonder why the cut could not have come earlier to avert the recent ERM crisis.

But the bank is thought to worry that upward pressure on the mark might lead to renewed volatility in European currency markets. Mr Tietmeyer said last week that a large rise in the mark was undesirable.