LOWER MARK RATE SPECULATION NOT SHARED IN GERMANY
Speculation abroad that the
Bundesbank will steer money market rates lower, opening the
for interest rate cuts around Europe, is not shared by many
economists and money market dealers within Germany.
    Speculation has developed that the Bundesbank would
engineer lower rates to take pressure off the dollar/mark.
    A strong rise in U.S. Market rates this month, prompting
speculation the Fed would raise its 5-1/2 pct discount rate,
has raised the question whether Germany and Japan would also
broaden interest rate differentials to support the dollar.
    The U.S.-Japanese trade dispute is the key to the interest
rate outlook, money market dealers in Paris said.
    Talks this week between Japanese Prime Minister Yasuhiro
Nakasone and President Reagan, if successful, could take
pressure off the dollar, dealers and economists said.
    Short term interest rates would be likely to ease if the
trade dispute is solved and the dollar steadies, they said.
    But if no solution is found, the Paris dealers said, a
renewed dollar fall would put strains on the mark/French franc
rate and force the Bank of France to raise short-term rates.
    The three-month U.S. Treasury bill rate rose to six pct
this week from 5.6 pct at the start of April, and the yield on
the 30-year benchmark treasury bonds rose this week in Tokyo to
a 14-month high of 8.86 pct from 7.66 pct in late March.
    The dollar stabilized today just below 1.80 marks and above
140 yen, underpinned by higher U.S. Rates and the Fed discount
rate speculation.
    But most dealers expect it to weaken further, which would
put pressure on the Bundesbank to ease interest rates.
    Japanese Finance Minister Kiichi Miyazawa said yesterday
the U.S. Had requested Japan to cut short-term interest rates.
    The Bank of Japan was making efforts to do this, he said,
adding the U.S. Had not asked for a cut in Japan's 2.5 pct
discount rate, a move which Bank of Japan Governor Satoshi
Sumita said was not under consideration.
    A call for a German move came yesterday from Dutch central
bank president Wim Duisenberg, who said the Dutch central bank
favoured a cut in West German interest rates and would follow
suit if it happened.
    Citibank AG said in its April report that another expected
phase of dollar weakness would prompt the Bundesbank to cut key
money market rates in the next three to six months.
    The Bundesbank has set a fixed rate of 3.80 pct on
repurchase pacts since February, with call money trading around
3.70 pct for much of April.
    Phillips and Drew senior European economist Richard Reid
said the Bundesbank would allow interest rates to ease further,
either with a lower fixed rate tender, or a tender by interest
rate, allowing the market to set the rate.
    "I'm fairly confident we'll see lower rates," he said.
    Reid said taking 30 basis points off the repurchase rate
would have little impact on the German economy or fundamental
exchange rates, but could change market currency perceptions.
    "A cut in German rates wouldn't be bad for the dollar, but I
think its effect would be limited in duration unless it was
accompanied by other measures elsewhere," he said.
    Money market dealers here noted the speculation abroad that
the Bundesbank would push down repurchase rates, but said the
Bundesbank had little reason to cut rates further at the
moment, despite the liquid market seen for most of this month.
    The dealers said the Bundesbank was likely to move to an
interest rate tender for its repurchase pacts next month. That
should not be seen as a sign of easing monetary policy however,
they said.
    The Bundesbank would merely be experimenting with interest
rate tenders, following the introduction of a new system to
speed up the tender process at the start of April, they said.
    Reinhard Pohl, head of the monetary policy section at the
DIW economic research institute in West Berlin, said the
Bundesbank would probably not cut rates on repurchase pacts.
    "I don't think that if they cut the repurchase rate a little
it would stop a wave of (currency) speculation," he said. But a
sharp and sudden deterioration in the dollar could force the
Bundesbank to take some action, he said.
    Pohl said the Bundesbank was concerned that a cut in
interest rates would accelerate excessive monetary growth.
    Some Bundesbank officials have argued recently that the
monetary overshoot was due to strong currency inflows rather
than credit growth, and therefore a more appropriate response
to excessive money supply growth would be to cut rates, to make
the mark and mark investments less attractive.
    Pohl said the Bundesbank was hoping that domestic investors
would switch funds parked in liquid short-term accounts, which
have swollen central bank money stock, into securities, which
would take them out of the Bundesbank's key monetary measure.
    A cut in interest rates at this stage however would lead
investors to assume that rates had bottomed out and the next
move would be upwards. They would therefore hold off buying
bonds, leaving central bank money stock swollen.
    There are so far no signs that German investors are
switching funds into long term securities as the Bundesbank
hopes they will, Berliner Handels- und Frankfurter Bank
economist Hermann Remsperger said.
    But Phillips and Drew's Reid said prospects of lower rates
and a strong currency would attract foreign investors into
German bonds, which would in turn attract domestic investors.
    Werner Rein, chief economist at Union Bank of Switzerland
in Zurich, said he thought it likely that interest rates would
continue to drift lower in many European countries.
    "The scope for lower rates is probably greatest in Britain
but more limited in West Germany, where we could see some
consolidation," he said. Switzerland could be forced to match
any cut in German rates to prevent the franc rising further
against the mark, he said.
    Currency dealers in London said another half-point cut in
U.K. Bank base rates was likely in the next few weeks as the
pound had shrugged off yesterday's cuts and was still rising.
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