The Bundesbank dampened the rate cut speculation by cutting its 'repo' rate only fractionally to a fixed 8.49 per cent. Under the repo system, the Bundesbank offers liquidity to German banks by buying bills from them that they have to repurchase on a pre- arranged later date.
The fixed repo rate was barely lower than the 8.5 per cent that emerged from last week's tender. If the Bundesbank did cut official rates on Thursday, it would lose money on the repo operation.
'One basis point is a small step for the markets, but a massive one for some council members,' said Alison Cottrell, of Midland Global Markets. She believes official rates may be cut on 18 March, but more likely on 1 April.
Eddie George, the Governor- elect of the Bank of England, said in Tokyo yesterday that conditions had been 'gradually arranged' for an easing in German interest rates, but he did not speculate on the timing of a cut.
Despite the cooling of German rate cut speculation, the pound advanced by just over half a pfennig to close at DM2.3765. It also climbed just under a cent to dollars 1.4495 and by 0.2 points to 77.3 per cent of its 1985 value against a basket of currencies.
The dollar fell by 0.65 pfennigs to end the day at DM1.6390, in part reflecting nervousness ahead of Friday's US employment figures. The market was also surprised by a sharp 13.8 per cent fall in new home sales in the US in January, following a 4.7 per cent rise in the previous month.
Britain's reserves of gold and foreign currency fell by an underlying dollars 59m to dollars 43.45bn last month, according to the Treasury. A small drop had been expected, with most of the intervention to support sterling in the run-up to Black Wednesday having been unwound already.
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