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THE OUTLOOK FOR INTEREST RATES

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On Thursday the Bundesbank cut German interest rates by half a per cent. Although most economists had expected a ra...
On Thursday the Bundesbank cut German interest rates by half a per cent. Although most economists had expected a rate cut, many were taken by surprise at the speed of the monetary easing. The move was probably a response to slower than expected money supply growth and easing inflationary pressures in the last month.

M3, the broad monetary aggregate, has risen in only one month this year, and consumer price growth looks set to decline towards the official target level of 2%

Weak German industrial orders data also revealed further weakness in the economy, and heightened fears of a move back into recession without an official move to boost the economy.

German interest rates are now at their lowest level for more than six years. The discount rate (which sets the interest rate floor) was cut to 3.5%, while the lombard rate (which acts as an effective ceiling to rates) was reduced to 5.5%. Other countries whose currencies are closely linked to the D-Mark followed the Bundesbank move, with monetary easing in Austria, Belgium, the Netherlands and Denmark. The Bank of France is expected to lower its key short-term interest rate later this week.

Earlier last week the US Federal Reserve Board decided not to reduce interest rates, but pressure is likely to mount for a cut at it's September 26 FOMC meeting. Kenneth Clarke, chancellor of the exchequer, and Eddie George, governor of the Bank of England, meet on September 7 to discuss UK interest rate policy, and an interest rate rise seems less even less likely as European monetary policy relaxes further.
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