Trade deficit with EU comes down: Cut in German rates raises hopes of boost in demand for British exports

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BRITAIN recorded its smallest trade deficit with other countries in the European Union for five months in January, the Central Statistical Office said yesterday.

At the same time an unexpected cut in German interest rates raised hopes of a boost to demand for British exports in Europe.

Imports from the EU outstripped exports by pounds 128m in January, the best figure since August's pounds 316m surplus, although the CSO warned that faulty seasonal adjustment could have flattered the figures.

Including previously published non-EU trade figures, this gave a pounds 916m whole-world deficit in January, down from pounds 1.6bn in December.

Exports are falling by less than 0.5 per cent a month on trend, while imports are rising by the same amount. Export prices continue to rise while import prices have flattened in recent months.

Considerable doubts still hang over the accuracy of the EU trade figures, which since the beginning of last year have been based on VAT returns rather than customs declarations. The CSO and Customs and Excise have launched an investigation.

The Bundesbank council decided to cut its key discount and Lombard interest rates - the floor and ceiling respectively for market rates - by a quarter point.

This triggered cuts in Austria, Switzerland, Denmark, Belgium and the Netherlands. The pound and dollar both rose against the mark on the move but then fell back.

Economists were not surprised to see the Lombard rate fall, but the cut in the discount rate to 5 per cent came two weeks earlier than expected, the last reduction having taken place in mid-February.

The German bond market initially reacted unfavourably amid concern that the Bundesbank had damaged its anti-inflationary credibility.

But most analysts saw the move as clearing the way for continued small but steady reductions in the 'repo' rate most closely linked to market rates. That fell on Wednesday from 5.73 to 5.7 per cent.

The Bundesbank said the move reflected the prospect of inflation falling below 3 per cent during the second half of the year from March's 3.2 per cent. Growth in the key M3 broad money supply measure was also expected to slow.

Gerard Lyons, economist at DKB International, predicted that the discount rate would fall to 4 per cent by the end of the year.

'The move shows that there is scope for short-term interest rates in Europe to decouple from rising rates in America, although there may be less scope for divergence in long-term rates,' he said.

The German move was not expected to influence British interest rates.

Hamish McRae, page 31