France makes further rate cut

THE BANK of France yesterday cut one of its leading interest rates by half a percentage point, signalling that French rates are on a steady downward course and suggesting that France may issue foreign currency bonds to rebuild its reserves.

The reduction in the overnight rate, to 8.75 per cent, drew a positive reaction from the markets, where the French franc firmed more than 3 centimes against the German mark to Fr3.5150. This is the third reduction in this rate since the demise of the European exchange rate mechanism on 2 August, when it stood at 10 per cent.

The French authorities appear to be nudging market rates down towards the key 6.75 per cent intervention rate ahead of the next meeting of the Bundesbank central council on 26 August, when some easing in German monetary policy may occur. Yesterday's market reaction suggests that further reductions may lie in store in the weeks ahead.

France's decision that rate reductions, however modest, take precedence over a firming currency has also stirred speculation that France may decide to rebuild its reserves partly by issuing foreign currency bonds, possibly denominated in dollars.

'This is a serious prospect, and it has to be in ecus or dollars,' Alison Cottrell, of Midland Global Markets, said. France has chalked up a foreign currency debt equivalent to Fr180bn ( pounds 21bn) owing to its defence of the ERM. Under the system's rules it has until mid-October to repay the bulk of this debt.