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Germany hints at lower rates
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October 14, 1998: 12:22 p.m. ET
Increased possibility of rate cut Thursday, but still seen as unlikely
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LONDON (CNNfn) - Speculation is growing in Europe Wednesday that Germany's Bundesbank could be about to cut rates.
Germany's central bank council is due to meet Thursday, and several of its members have been dropping hints of an unexpected easing in monetary policy.
In late European trading, the mark weakened slightly against the dollar to 1.64. In Frankfurt financial stocks were strong on the back of rate-cut hopes.
Economists warned however, that second-guessing the Bundesbank is a difficult game.
"It can't be entirely ruled out, but it looks unlikely to me," said Gwyn Hacche, Senior European Economist at HSBC Securities.
Economic conditions in Germany and France haven't really been affected yet by falling demand overseas, reducing the need for lower rates, said Hacche.
"A rate cut is back on the agenda though," he added.
Bundesbank council member Klaus-Dieter Kuehbacher said Wednesday that a dollar exchange rate below 1.60 marks was worrying.
In an interview with Berlin's InfoRadio station Kuehbacher was asked if he would rule out an interest-rate cut by the Bundesbank in the remaining months before the start of European monetary union, a notion rejected by senior Bundesbank officials in recent weeks. Kuehbacher said:
"I rule nothing out -- if the ECB (European Central Bank) recommended that we do it for the whole of Europe, then one would have to seriously consider it," Kuehbacher said.
Kuehbacher said a dollar rate below 1.60 marks was "no longer pleasing," according to the station. "Below 1.60 things start to get uncomfortable," Kuehbacher said.
Fellow Bundesbank council member Ernst Welteke said Wednesday that German interest rates could be reduced as low as 3 percent.
In an interview with German financial magazine Boerse Online, Welteke said, "In Germany rates could be brought down to 3 percent," but added that such a step "must be decided on a European level because doing it alone two months before the beginning of the currency union would enlarge the current convergence span."
The German securities repurchase rate now stands at 3.30 percent. Welteke said a dollar/mark exchange rate of 1.63 was not a cause for worry.
But further declines in the U.S. currency's value, which he does not anticipate, would have more serious consequences for German exporters, he said.
Inflation data announced in the UK and Spain Wednesday gave further impetus to rate cut hopes.
From staff and wire reports.
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