Germany leads rates down across Europe

Interest rates fell further across Europe yesterday, led by the German Bundesbank which was followed swiftly by moves from several other countries. And in the US, subdued inflation and economic activity in November strengthened the possibility that the Federal Reserve will cut rates when it meets on Tuesday.

In the City, the short sterling contract used to speculate on future interest rates ended the day implying base rates below 6 per cent by June. Eddie George, the Governor of the Bank of England, revealed that he had anticipated a cut by the German central bank when recommending the reduction in base rates on Wednesday.

The Bundesbank cut the discount rate, which sets the floor to German interest rates, from 3.5 to 3 per cent. It also brought down the ceiling Lombard rate from 5.5 to 5 per cent and said that the repo rate, the main rate it uses in the money markets, would be fixed at 3.75 per cent until early January.

The move down in Germany prompted a wave of cuts in Europe. Austria, Denmark, Belgium, the Netherlands and the Irish Republic followed suit. The Swiss National Bank had earlier reduced its discount rate from 2 to 1.5 per cent.

The Bundesbank said it had cut rates because of low monetary growth, together with the strength of the mark and low inflation, currently 1.5 per cent. It set a target of 4-7 per cent growth for monetary expansion next year.

Economists said the principal reason for the cut was the weakness of the German economy. "They were looking at low growth against a background of very low inflationary pressures," said Richard Reid at UBS in Frankfurt.

The cut in rates was expected to provide a helping hand for the beleaguered French government. There was now scope for a 1 per cent reduction in the Banque de France's intervention rate, said Paul Hammett, economist at Paribas Capital Markets.

In the US, a fall in consumer price inflation from 2.8 to 2.6 per cent and a drop in the growth of industrial production from 2.7 to 1.9 per cent in November were generally interpreted as further ammunition for a cut in rates by the US Federal Reserve next week.

"The figures left the decision narrowly in favour of a quarter per cent move," said Mark Cliffe, economist at HSBC Markets.