Hopes grow of further Bundesbank rate cut

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THE Bundesbank may soon reduce its key Lombard rate, and allow Norman Lamont to justify a further cut in base rates, analysts believe. The bank's policy-making council meets this Thursday, and a reduction in rates could defuse the tensions surrounding the 16 October summit of European Community leaders, called to consider the prospects of ratifying the Maastricht treaty.

The speculation of a new German move has spread throughout financial markets, although Frankfurt analysts are more guarded. They say a reduction could still be weeks away, and may only occur if there is a further realignment of European Monetary System currencies, including a devaluation of the Irish punt and the Spanish peseta.

Nevertheless, European monetary officials say the Bundesbank has in recent weeks become increasingly aware of the deepening economic slowdown in Germany, and is likely to shave official rates 'sooner rather than later'.

Since 14 September, when the Bundesbank cut the Lombard rate a quarter of a point to 9.5 per cent, and the discount rate by half a point to 8.25 per cent, German money market rates have fallen almost a point from the 9.70 per cent peak.

German industrial orders have fallen under the weight of the weakening domestic economy, and ebbing export growth, which has been hit by sluggish foreign markets and the strong mark. Retail sales have also declined, and expectations of a pick-up in third-quarter gross national product, after a decline in the second, are fading.

Rate cuts in Italy, Belgium, the Netherlands, Sweden and Finland have only served to heighten the impression that the Bundesbank is poised to move. Bundesbank officials have gone to some lengths to play down the importance of the surge in German broad money supply, M3, once seen as the paramount indicator of German rate changes.

Nevertheless, speculation over an early easing in German rates is weakening the mark against the dollar and other currencies. On Friday, sterling closed 4.59 pfennigs higher at DM2.5169. The pound has now regained more than 14 pfennigs from its low of DM2.3680 reached last Monday, and its continued recovery could be used to justify another cut in UK rates.