960415

Germany likely to cut rates once more before 97 - survey

FRANKFURT: The Bundesbank is likely to cut interest rates one final time during the current economic cycle before reversing gear and raising rates in early 1997, according to economists interviewed in a Reuters survey published on Monday.

The survey results showed 22 of 33 economists expected at least one further cut in the discount rate, the floor of German short-term rates, while the remaining one-third said the rate -- now at three percent -- had probably bottomed.

The strong predictions for a German rate cut come against the background of forecasts for a marked slowdown in the economy during 1996.

The average forecast results showed growth of 1.2 percent for 1996, down from a slowing 1.9 percent in 1995. But growth should pick up again in 1997 with an increase of 2.5 percent.

Economists in the survey, carried out between April 1-3 to measure opinions on the German economy, also expected inflation to stay under control over the next two years.

But many said the rate of consumer price rises, which was an annualised 1.4 percent rate in February, had probably already reached its low-point for the current economic cycle.

The Bundesbank's main policy indicator, M3 money supply, was also likely to grow more slowly later in 1996 after double-digit annualised rates during the first few months.

Most economists said they expected M3 growth to ease to just below the upper end of the Bundesbank's 1996 target range of four to seven percent by the year-end.

The mark will also keep up its current pace of weakening against the dollar during the next year but remain mostly steady against the yen and sterling, according to the survey.

The mean of 35 forecasts showed the dollar at 1.4968 marks on the last day of the 1996 second quarter and rising to 1.5194 marks at the end of the 1997 first quarter.

But the mark should regain some strength to trade at 1.4965 marks at the end of the 1997 fourth quarter before stabilising at about 1.5027 marks at the end of the 1998 first quarter.

The survey also showed the sterling/mark cross rising to 2.2612 marks at the end of the 1996 second quarter but falling to about 2.2495 at the end of the 1997 first quarter before surging by the end of the 1998 first quarter to 2.2880 marks.

Against the yen, the survey showed the mark slipping to 72.1 yen at the end of the 1996 second quarter and staying at about that level until the 1997 fourth quarter, when the survey showed the yen/mark cross falling to 71.5 yen.

But the survey showed the mark quickly recovering against the yen in the 1998 first quarter to trade at 73.0 yen.

One of the more pessimistic outlooks for the mark against the dollar was from HSBC-James Capel in London, which said the mark should strengthen against the dollar on views Economic and Monetary Union (EMU) would not take place.

The bank predicted the dollar would fall to 1.41 marks in the 1996 third quarter and eventually to 1.38 marks in the 1997 second quarter and remain at that level until the end of the 1997 fourth quarter.

"We believe the mark will get much stronger. People are going to start having trouble meeting Maastricht criteria," said HSBC-James Capel international economist David Bloom.

But DKB in London was more optimistic about the dollar's future, predicting it would end the 1996 fourth quarter at 1.62 marks and rise to 1.70 marks in the 1997 third quarter and remain at that level through the 1998 first quarter.

"We think the mark is still significantly overvalued. Even when the German economy is picking up, it will still be suffering from structural problems," DKB economist Nick Stamenkovic said.-Reuter