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Bundesbank ready to

sanction further repo fall

FRANKFURT: The German Bundesbank, which this week sanctioned the first notable fall in a key money market interest rate since March, signalled on Friday it was prepared to let the so-called repo rate fall further.

Bundesbank Deputy President Johann Wilhelm Gaddum told Reuters in a telephone interview that there was still room on the downside for banks to pitch bids lower in securities repurchase operations, if they judged this to be appropriate.

Gaddum said a certain room for manoeuvre remained between the 4.45 percent repo rate and the 4.00 percent discount rate.

"We have a room for manoeuvre which is limited on the downside by a certain gap (between the repo and) the discount rate. But this line has not been exhausted yet," he said.

"From this point of view there is certainly room to manoeuvre on bidding, which the banks should use according to their own judgement," he said.

The dollar, already gaining ground on the mark, was boosted by Gaddum's comments, ending the day up around 1-1/2 pfennigs at 1.4365 marks. German shares were also helped higher.

Analysts said the comments made clear that the Bundesbank was prepared to allow the repo rate to drop gradually, possibly in the build-up to a discount rate cut sometime in September.

"I think the last repo allocation was the first step in a series which could take the repo rate down by about 25 basis points," said Armin Kayser, economist at Swiss Bank Corp.

"After that will come the big deliberation as to whether inflation and other data will allow a discount rate cut. I am inclined to think they will," he said.

Slowing inflation and sluggish money supply growth are seen by many analysts as providing the basis for a rate cut, which some believe is needed to kickstart a slowing economy.

A lack of reliable official data due to changes in the calculation means no one has a clear view of the true state of the German economy, but many believe the pace of the recovery from 1993's recession has slowed sharply in the first half.

Unemployment remains stubbornly high with around 3.6 million jobless and a growing number of companies are complaing bitterly that the strong mark is hurting profits.

In a variable rate securities repurchase tender, banks bid for central bank funds at an interest rate of their choice. The funds are then allotted by the central bank to the highest bidders against a deposit of securities.

Cautious bidding by conservative banks had left the repo rate clinging to 4.50 percent since the Bundesbank slashed the rate to that level in March from 4.85 percent, simultaneously cutting the discount rate to four percent from 4.50.

Last week, the Bundesbank made clear that it was keen to see banks bid more aggressively, both in comments from Bundesbank officials, including Gaddum himself, and by keeping the German money market well-supplied with liquidity.

Gaddum said that the outcome of last week's repo was in line with the Bundesbank's expectations. He declined to comment directly on the bank's further intentions on the repo rate.

He also warned markets against becoming too euphoric about the prospect of further falls in the repo rate. "It can be dangerous if the interest rate cut expectations take on a life of their own," he said.-Reuter