Germany expected to lower rates

The first reduction in German interest rates for four months is expected today. The repo rate - the rate at which banks bid for funds from the Bundesbank - is expected to fall from 4.5 to between 4.45 and 4.48 per cent.

Julian Jessop, European economist at HSBC Markets, said such a drop was now taken for granted. The fall in the rate may be small but its direction is regarded as significant. Holger Fahrinkrug, economist at UBS in Frankfurt, said: "It tells you the Bundesbank is back in the easing business."

While the market is not expecting a big shift in interest rates at today's council meeting, the first since the summer break, a cut is seen as highly likely in early September. Mr Jessop believes the discount rate, which sets the floor to German interest rates, will fall at the Bundesbank Council meeting on 7 September.

The confidence of the markets about a fall in the repo rate follows the clear lead given by Johann Wilhelm Gaddum, deputy chairman of the Bundesbank council, who is in overall charge of money market operations. Last week, he asked in an interview why banks were not submitting bids to the Bundesbank at lower rates.

Another signal given by the Bundesbank was to drain less liquidity from the repo market last week than had been expected following the reduction in minimum reserve requirements.

A recent speech by Otmar Issing, the German central bank's chief economist, has also widely been interpreted as flagging the way to further reductions.

It painted a broadly optimistic view about prospects for inflation in Germany, which rose 2.3 per cent in July.

A slight fall in unemployment in July did little to dent confidence about the outlook for interest rates.

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