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Flagging mark gives

france,Spain scope

to loose monetary

policy

More Euro rate cuts seen

without Buba green light

LONDON: A flagging mark has given countries like France and Spain scope to loosen monetary policy without a lead from the Bundesbank, analysts said on Wednesday.

"European central banks can cut as much as they dare right now," said Steve Major, the Paris-based head of bond research at Credit Lyonnais. "These are not coordinated but coincidental cuts and the door has been opened by the position of the mark."

The French franc recently touched a 22-month high on the mark, the peseta has hit 15-month highs, and the Swedish crown has been buoyant after weak performances last year.

The Bank of Spain on Wednesday cut its repo rate to 7.75 percent from 8.25. Sweden sliced 75 basis points off rates on March 21 and the Netherlands last week eased by 10-15 b.p. Many say France will cut its 3.80 percent intervention rate Thursday.

"The cut in Holland did not get the hype it deserved," Major said. "The Dutch pushed rates half a point below the German equivalent, which almost defies gravity."

Some expect the Bank of Italy to cut soon too. It has not cut since last May and growth could taper as trading partners German and France remain lacklustre, analysts said.

"We should see a sharp steepening of the Italian yield curve soon," said Adrian Owens, an economist at Bank Julius Baer.

"Italy could cut as much as 50 basis points after the April 21 elections and then another 50 basis points a few months later," Owens said

The cuts are not just a matter of convenience.

"These countries sorely need to boost domestic demand or else their economies will stagnate and they will miss Maastricht criteria by a wide margin," said Stephen Lewis, director of research at London Bond Broking Company.

Sweden, Italy and Spain all face sharply lower growth prospects this year after export-led gains in 1995, and they all have high budget deficits, said Owens.

"If you are looking for serious rate cuts, Sweden, Spain and especially Italy have the most potential," he said.

Inflation levels there permit lower rates too, he added.

"All of these countries are facing similiar problems because they are all working within the framework of the Maastricht treaty," said Lewis.

Nonetheless, sustained dollar strength is key.

"If we see some change in this exchange rate background, we could see the central banks pull back from their present rate cutting strategies," said Lewis.

The Bundesbank still looms large over neighbour central banks. "The extent to which any country cuts rates is restrained by the Bundesbank," Mark Cliffe, chief international economist at HSBC Markets in London.

"We won't see another substantial racheting down of rates until the Bundesbank moves, and they should wait until the May release of March M3 money supply data," he added.

France pays particular heed to German monetary policy and its ability to adjust rates is thus limited, economists said.

"French policy is to reduce its interest rate as close as possible to German repo rates," said Owens. "The Bank of France only has scope for a 25 basis point independent move. Beyond that, the market loses confidence."-Reuter