Heat to remain on franc

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The Independent Online
THE FRENCH franc is expected to remain under pressure this week, with economists becoming increasingly convinced that the Bank of France will cut its interest rates before long.

The franc fell by two-and-a- quarter centimes on Friday to close at Fr3.4895 to the mark, nearly six centimes below its former floor of Fr3.4305 in the European exchange rate mechanism. Hopes of a rate cut last week saw the French stock market close at its highest level for three years.

In the week since the ERM was in effect suspended, the franc has remained unexpectedly strong as the Bank of France has left its interest rates unchanged. Dealers had expected rates to be cut sharply, as the effect of high borrowing costs on the French economy was a main reason for the ERM reaching breaking point nine days ago.

Dealers took some encouragement that a rate cut might be on the way, as the Bank of France restored its 5-10 day lending facility at a rate of 10 per cent. This is expected soon to be reduced to 7.75 per cent, its level before the currency crisis.

But Steve Barrow, economist at Chemical Bank, said it could be a couple of weeks before a significant rate cut was made. He said the cut could come around the same time as the Bundesbank's next council meeting on 26 August, at which the key discount rate is expected to be cut by half a point to 6.25 per cent.

The Bank of France may be keeping interest rates high to keep the franc strong while it buys marks to rebuild its reserves.