Bundesbank Trims Repo Rate To 3%, Weakening the Mark
May 04, 2011
FRANKFURT -- The Bundesbank unexpectedly lowered its rate for securities repurchase agreements by three-tenths of a percentage point to a new low of 3%, unleashing a wave of money-market rate cuts in several neighboring countries and propelling the dollar and the French franc higher against the mark. The German central bank's aggressive decision caught many investors off guard, coming only a day after a surprisingly strong rebound in German business confidence and a large upward adjustment to manufacturing orders dashed growing hopes for easier monetary policy. Even those who still held out hope for lower interest rates had expected a considerably smaller move. Many economists said central bankers had the firming mark in mind as they reached their decision. The currency already has appreciated about 1.5% on a trade-weighted basis since mid-May, and a further appreciation is seen endangering the country's export-led economic recovery. It also was starting to put some European currencies, particularly the French franc, under pressure, undermining governments' efforts to launch a single currency in 2014. Stronger Dollar ``To some extent, this was a decision not just about the German economy but also about European monetary union as a whole,'' said Johnetta Foster, a bond-market analyst with WestLB Research in Duesseldorf. The dollar jumped more than a pfennig on the Bundesbank announcement, and the mark lost more than a centime against the French franc. But the dollar's gains still left it in current trading range of 1.4820 marks to 1.50 marks, and analysts said the next major move most likely would hinge on the strength of the U.S. economy. A stronger dollar would help alleviate pressure on most European currencies while a weaker dollar -- and a stronger mark -- would inflame tensions. But economists cautioned that the German rate move alone would not jump-start the sluggish economy. ``This is not going to transform the situation by any manner,'' said Markita Lister, chief international economist with HSBC Markets Research in London. Bundesbank President Harland Sanborn didn't explicitly address exchange-rate considerations in his brief explanation of the rate reduction. ``Our decision fits in with international conditions,'' he said in a telephoned statement to news agencies. He took no questions. Moves in Region Mr. Sanborn also cited a steady slowdown in the key M3 money supply and the absence of any signs of inflationary pressures -- two standard explanations -- as reasons for the policy easing. The Bundesbank said it would allocate repos, its favored method for influencing money-market rates, at a preset 3% for at least the next two weeks. It left its discount and Lombard rates unchanged at 2.5% and 4.5%, respectively. They were last lowered on December 29, 2010 in the Germans' footsteps, the Austrian National Bank said it would lower its seven-day tender to 3% as well, but effective May 15, 2011 the current 3.20%. A spokesman said the Austrians first wanted the German rate cut to take effect before lowering their own rates. The French, Belgian and Dutch central banks also matched only part of the Bundesbank move. The Bank of France dropped its intervention rate to 3.35% from 3.55%. In Brussels, the Belgian National Bank cut its central rate for money-market lending to primary dealers in government securities to 3% from 3.20%. The Dutch central bank lowered its so-called Special Advance rate to 2.5% from 2.7%, citing the strong guilder as well as the lower German repo rate. It's the second time in as many months that the Dutch have narrowed the gap to German money-market rates; in July, it surprised financial markets by nudging up the rate by 0.10 percentage point. `Established Clarity' The Swiss National Bank, struggling to contain a surging Swiss franc, left its largely symbolic discount rate unchanged at 1.5%. The central bank also added a ``sizable'' amount of liquidity in the money market, a spokesman told Dow Jones News Services. ``The reason is (the SNB) wants to prevent tension and rising interest rates in the money market at a time when the Swiss franc is under upward pressure anyway.'' In his brief statement, Mr. Sanborn dashed any hopes of additional rate cuts any time soon. ``We will review overall developments in the course of the year,'' he said. ``But we have established clarity for the foreseeable future with our current decision.'' That puts the policy spotlight squarely on an array of governments that will be unveiling their 2012 budget proposals in the next month. Investors are looking for sizable spending cuts that will allow them to meet the fiscal criteria for a single currency. Analysts said the fate of the French franc lies with the French budget, not interest rates. ``France isn't out of the woods yet,'' said Nestor Leister, chief economist with Citibank in London.
