European markets fear German interest rate rise

European markets have again been hit by fears of higher German interest rates, while in New York share prices also fell back, partly due to the resulting weakness of the US dollar. In New York, the Dow Jones was driven lower in mid-session by computer selling on pre-programmed trades. It later closed down 77.35 points at just over 7782, a drop of 1 per cent.

The German Bundesbank kept its main money market rate steady yesterday, but many analysts say the central bank must soon deliver on its threat of higher interest rates.

Financial markets appear increasingly of the view that higher German interest rates are inevitable, despite the Bundesbank's decision yesterday to keep the securities repurchase rate, or repo, fixed at 3 per cent. The repo, the Bundesbank's main wholesale money market rate, has remained steady since August 1996.

The central bank also does not want to throw away the impact of its threat to foreign exchange markets of a possible rate hike, which has weighed on the dollar and sent it tumbling yesterday about 2.50 pfennigs to under 1.80 deutschmarks.

The German Chambers of Industry and Commerce (DIHT) added to speculation about a rate rise, saying it hoped inflation could be held below the psychologically important 2 per cent level but that a rate hike would not be good for the economy.

Preliminary data this week on west German inflation for August showed the consumer price index at its highest since April 1995, putting annual inflation at 2 per cent and at what is considered the threshold to the Bundesbank's danger zone.

In Dublin, the pound gained some ground against sterling, which eased in tandem with the dollar. Having traded over 92p at one stage, the pound closed 0.5p stronger at 91.91p sterling. Dealers said that corporate sellers of the Irish currency emerged once it rose over 92p sterling.

On the stock markets, Wall Street's weak opening reinforced the ripple of profit-taking already seen across European bourses, and investors are in no mood to push prices higher for now, especially with a raft of US economic data due this week.

In Dublin, share prices fell in common with other markets, and the ISEQ index ended almost 0.75 per cent lower. The main losers were again the financial stocks, with Bank of Ireland down 5p to 767p and AIB falling 2p to 568p.

German shares were worst hit, dropping almost 3 per cent, and pushing DAX index well below the key chart level of 4,000. London, absent on Monday for a bank holiday, lost earlier gains to show modest final losses of 0.3 per cent, while French shares fell 1 per cent.

The dollar initially firmed on news of unchanged German interest rates, but then dropped sharply on expectations that increase rates would soon rise anyway to head off inflation after strong German economic data on Monday.