Hopes revive for cuts in interest rates

HOPES of interest rate cuts across, Europe have been revived by a surprising low increase in German money supply figures.

The German money figures were nowhere near as bad as many had feared. The annualised increase of 8.4 per cent was not as good as previous months and outside the government's official target of 4 to 7 per cent. However, some analysts' had predicted growth of up to, 20 per cent.

"This implies lower official rates in Ireland and a round of reductions in mortgage rates within the next month or so," Mr Austin Hughes, economist at Irish Intercontinental Bank, said.

The money supply figures are important because the Bundesbank puts a lot of emphasis on money supply growth as an inflationary indicator. Officials have consistently said further rate cuts cannot be expected until the bank has seen the figures.

Mr Hughes said the money supply data and evidence that factory gate prices are falling imply that inflation in Germany will remain subdued at around the 1.5 per cent level.

The Bundesbank's chief economist, Mr Otmar Issing, added to the belief that a rate cut was on the way when he said he expects money growth to slow in the coming months as economic weakness levels to a slower credit uptake.

However, even if there is a rate cut, it may be the last for some time. The longer term rates in Germany and elsewhere have been rising in recent weeks. "So much of German lending is funded on the long end that it poses a dilemma for the Bundesbank," said Mr John Beggs, chief economist at AIB Group Treasury.

"The market needs to be confident that a rate cut is justifiable or long term rates will go even higher," he added. Long term rates in Germany eased slightly yesterday to 6.28 per cent from 6.3 per cent.

Mr Dan McLaughlin, chief economist at Riada Stockbrokers, also pointed to the difference between pointed rates at the long end and short end. For example, three month money in the German futures market at the year end was at 3.20 per cent a month ago; it rose to 4 per cent on Thursday but fell back to 3.75 per cent on Friday.

Irish short term rates fell back slightly to around 5 per cent but did not trade under the key 5 per cent level, which is likely to trigger further retail rate cuts.

Meanwhile the pound continued to gain slightly against sterling, trading at around 103p. Sterling continued its recent decline against the deutschmark.

However, activity was quite muted, said Mr Beggs. But because the dollar "shows no signs of rallying" the pound is likely to continue its upward march against sterling. Sterling traditionally follows movements in the dollar. Although even if the dollar does rally many analysts believe that political worries in Britain will stop sterling following it up. "The pound at 104p and above is still likely," Mr Beggs said.