950830

Bundesbank lets repo

rate decline again

FRANKFURT: The Bundesbank allowed its key money-market rate, the repo, to fall to 4.30 percent from 4.39 percent on Wednesday, following up on a half-percentage point cut in its discount and Lombard rates last week.

Analysts welcomed the cut -- which was in line with market expectations -- but said it did not offer definitive clues on the future course of the official discount and Lombard rates.

They said the chances for a future reduction in official interest rates would depend on developments in the central bank's main policy indicators -- inflation and M3 money supply -- as well as economic trends.

"If inflation comes down and GDP is bad ... then we should not rule out speculation for another rate cut," UBS senior economist Walter Metzler said.

The Bundesbank said last Thursday it was cutting its discount rate to 3.50 percent from four percent and its Lombard rate to 5.50 percent from six percent.

It said the main reason for the rate cuts -- which sparked easings in several other European countries -- lay in sluggish growth in M3 money supply, which contracted at an annualised rate of 0.4 percent in July from the final 1994 quarter.

Some analysts said last week they believed that these would be the last official rate cuts in this easing cycle.

But analysts told Reuters Financial Television just after the repo easing was announced on Wednesday that they were now more optimistic that German rates had not yet bottomed.

The repo, which sets the tone for German money market rates, floats within the boundaries of the discount and Lombard rates and its movements can give clues to future rate trends.

The repo easing also allowed Belgium, where money-market rates are linked very closely to German levels, to cut two of its interest rates, taking the central rate to 4.30 percent from 4.40 and the end of day rate to 5.55 from 5.65 percent.

Comments from various Bundesbank officials, pointing to more scope for easing on the repo rate, supported the view that further rate cuts were possible, the analysts said.

Hans-Juergen Koebnick, president of the Bundesbank in Rheinland-Palatinate state, told the Handelsblatt newspaper in an interview published on Wednesday that he saw room for German interest rates to ease further.

"The repo rate is moving," the Handelsblatt quoted him as saying. The central bank's latest half-point rate cuts had exhausted part of the market expectations for cuts "but there is still some leeway to act," he said.

German money-market traders had expected a fall of around 10 basis points -- a tenth of a percentage point -- in the central bank's repo rate this week. They expect the rate to continue to fall gradually in coming weeks.

"Now we will see smaller repo rate cuts," one analyst said.

Robin Marshall, chief economist at Chase Manhattan Bank in London, warned that the Bundesbank council may take its time before announcing another official cut.

Noting policy was last eased in March and that the council rarely announces any policy changes in quick succession, he said "we may see a longer time lag before the next cut," which could come in early 1996.-Reuter