THE Bundesbank's aggressive rate cut yesterday has been seen in the markets as a move to bolster the French franc as much as an attempt to reinforce the German economic recovery.

The German central bank lowered its securities repurchase (repo) rate, through which it influences the money market, from 3.3 per cent to a new low of 3 per cent, citing slower growth in the money supply as the main reason for the move.

European share and bond prices moved ahead on the news and the dollar strengthened against the deutschmark.

In London, news of the Bundesbank's decision was greeted with shouts of surprise on trading floors.

The Bank of France quickly followed the Bundesbank, cutting its intervention rate by 0.2 percentage points to 3.35 per cent.

Last month, President Jacques Chirac criticised the management of France's banking system and said French and German interest rates were "clearly too high". His remarks are widely believed to have contributed to this month's depreciation of the franc.

Yesterday, the French currency and the Paris stock market responded favourably to the reductions. The franc rose strongly against the D mark, to FFr3.409 at close of trading in London, from FFr3.421 on Wednesday. The benchmark CAC 40 index closed ahead 0.86 per cent at 2,017.87.

A repo rate cut had been expected after the Bundesbank took no action at its last council meeting in July, but most economists and traders had expected a cut to around 3.2 per cent. Several economists thought further repo cuts and even a lower discount rate currently 2.5 per cent - were now possible.

Dr Hans Tietmeyer, Bundesbank president, said the reduced July growth rate in the M3, the broad monetary aggregate, announced this week was "decisive" in the rate decision. But low inflation, with no dangers to price stability on the horizon, had also influenced the move.

He added the repo cut was also consistent with international conditions, though he made no reference to the problems of the French franc.

Some economists said there was a strong European dimension to the Bundesbank's rate cut. The move would also help German exporters by braking the D mark's rise, they said.

"We are getting more aware in the run up to European monetary union that policy moves have international implications," said Mr Klaus Friedrich, chief economist at Dresdner Bank in Frankfurt.