Bundesbank economist hints at interest rate cut

A SENIOR Bundesbank official has fuelled further hopes of an early cut in German interest rates.

The bank's senior economist, Mr Otmar Issing, yesterday appeared to give a gentle hint that rates would have to fall, expressing doubts that the German economy could continue to recover from a year long bout of economic weakness. Mr Issing also made it clear that the Bundesbank was unhappy with the recent rise in the deutschmark against other currencies.

In a newspaper interview, Mr Issing said "the recovery is not yet robust enough that you can say with certainty that it will continue". He then added that "an appreciation of the mark does not fit into the current economic landscape".

The already weakened sense of business confidence was sensitive to the level of the currency, Mr Issing said. He also reiterated that he was confident M3 money supply growth would continue to slow.

His comments immediately served to depress the German currency on foreign exchange markets amid growing expectations that the bank may be preparing to cut its key interest rates as early as next week.

The D mark's retreat also helped to take the pressure off other currencies. The dollar and sterling both moved ahead, while the pound managed to ease marginally in late trading against the British currency to trade at just above 103p sterling while gaining a pfennig against the D mark to close at DM2.3890.

An early cut in German interest rates is expected to have little impact on Irish interest rates, however. In Dublin, wholesale interest rates continued to trade above 5.5 per cent, the level which is likely to trigger a rise of a half of one percentage point in bank and building society rates. Key one month money market rates, on which retail rates are based, closed at 5.6 per cent.

Meanwhile French Prime Minister, Mr Alain Juppe has sought to claim money market jitters which have hit the French franc in recent days, by denying any conflict between the government and head of the Bank of France.

In an impromptu interview with three news agencies, Mr Juppe expressed broad confidence in the French economy.

"With a trade balance in the black and inflation under control, we now have conditions in place for sustained stability for our currency," he said. In a clear reference to the recent weakness of the franc, he added. The exchange rate policy of the government is clear and will not change. We want the franc to remain stable against other currencies in the European Monetary System to benefit from the best possible interest rates, which are the condition for sustained support of activity. There is no question of changing this policy," he said.

Mr Juppe said reports of a clash between President Jacques Chirac and Bank of France head Mr Jean Claude Trichet over interest rates were unfounded. Mr Chirac had said in a television interview last month that interest rates, set independently by the central bank, were too high.

Inflation figures, due to be published in Britain today, are expected to fuel a conflict over interest rate policy between Chancellor of the Exchequer, Mr Kenneth Clarke and Bank of England governor, Mr Eddie George.

The Chancellor yesterday appeared to give a clear indication that he did not intend to be rushed into higher interest rates by the bank's worries about inflation.

However, a steeper fall in unemployment than expected and an upward revision in earnings figures published yesterday supported Mr George's ease that the economy's accelerating revival could push up prices too quickly.