Buba Triggers European Rate Cuts With Easing
The central bank said after its regular council meeting it was cutting its securities repurchase rate, or repo, to three per cent, a historic low, from 3.30 per cent. Its official discount and Lombard rates - the floor and ceiling for German money market rates were held steady at he 2.50 per cent and 4.50 per cent respectively, in line with economists' expectations.
Market speculation in advance of the meeting had centred on the repo rate, which the Bundesbank has held steady since February, despite lowering its official rates in mid-April.
Other European central banks, keen to cut credit costs to boost economic growth, quickly followed the Bundesbank's lead.
The Bank of France responded by immediately cutting its intervention rate to 3.35 per cent from 3.55 per cent.
Belgium cut its central rate to three per cent from 3.00 per cent and Austria reduced its Gomex rate to 3.30 per cent from 3.4 per cent and its repo to three per cent from 3.30 per cent.
The Bundesbank gave no explanation of its decision in an initial statement made after the council meeting.
But economists said a slowdown in M3 money supply growth - its leading monetary policy indicator - to an annualised 8.6 per cent in July from 9.6 per cent in June had probably tipped the balance in favour of a cut.
The move came despite data released this week which shows that the German economic recovery is on a stronger footing that many economists had thought.
Financial markets' attention had been riveted on the outcome, with many players saying the Bundesbank had to act to avert an outbreak of tension in currency markets.
Four weeks ago, markets were thrown into confusion when the Bundesbank failed to deliver a repo easing although comments from several senior central bank officials had made clear in advance that financial markets should be prepared for a move.
The result was a renewed fall in the US dollar and a series of attacks on the French franc, driven by market worries that the Bundesbank was trying to do its utmost to undermine European monetary union by braking European economic growth.
Solid economic growth would help European governments to rein in their budget deficits, the main barrier most countries face in qualifying to join the single European currency.
Hopes for an easing had dwindled on Wednesday and Thursday, after fresh economic statistics indicated that the economy was in better shape than many had thought, removing one basic argument in favour of easing monetary policy.
A Reuter survey showed seven of 10 economists polled believed the Ifo institute business climate index, which on Wednesday jumped to an eight-month high of 94.1 in July, had decreased the chance for a repo rate cut.
A poll of the economists before the Ifo data showed 8 of 10 economists expected a rate cut of five to 20 basis points. Economists were surprised by the size of the move. Uwe Angenendt at BHF Bank in Frankfurt said, We had not expected such a large step. This is positive news for the dollar. I see a strengthening of the dollar against the mark on this news.
He added, It is difficult to say whether this will be the end of rate cuts in this cycle. We see a strengthening of the economy, and against that background it could be an end to this cycle. But we have to wait for more data.
But Stefan Schneider, Senior Economist at Paribas Capital Markets in Frankfurt said he believed German rates could now have bottomed.