Bundesbank fails to cut repo rate

THE Central Bank intervened and bought pounds in the foreign exchange market again yesterday after the Bundesbank surprised the market and kept German interest rates steady.

The moves will put further pressure on exporters, who are already seriously worried about the strength of the pound against sterling.

The Central Bank moved after the German central bank knocked more than a pfennig off the dollar, sterling and the pound by defying market hopes for a small cut in its main money market interest rate.

The pound ended at 103.96p against sterling and at 2.3947 deutschmarks. Analysts say it is only a matter of time before the 104p level is properly breached.

Dr Dan McLaughlin, chief economist at Riada Stockbrokers, said this was an "ominous trend" and could only lead to an even stronger deutschmark.

It will put pressure on the other ERM currencies and, instead of converging, we may well be in for a period of divergence, he said. "It makes the next rate rise a lot closer."

He also warned that if the Central Bank was serious about holding our rate against the D-mark it would have to face a rate against sterling of 104p or even 105p.

The German central bank said in a statement issued after a regular council meeting that its main money market rate, the securities repurchase interest rate or repo, was held steady at 3.30 per cent, the level which has prevailed since February. The repo will remain at that level for the next four weeks, until the central bank returns from its summer break.

Financial markets had broadly expected a small easing in the repo rate, which they hoped would ease pressure on the mark and allow the dollar and sterling to strengthen. European currency trading was thrown into disarray by the decision to make no changes in policy.

The additional dollar gains are a new blow for the German economy, which is just starting to pick up again after some months of severe weakness. A surge in the D mark due to prolonged dollar weakness last year is generally acknowledged as a major reason for the economic downturn last time around. An over strong currency makes a country's exports too expensive.