Franc and punt await rate move

EUROPE'S central banks are braced for fresh attacks on the French franc and Irish punt if, as expected, the Bundesbank fails to cut German interest rates at its council meeting today.

Rumours of a cut circulated in the German bond and capital markets yesterday but Helmut Schlesinger, the Bundesbank president, stressed that 'the priority of monetary policy remains containing inflationary risks'.

The Bundesbank also said there would be no press conference after the meeting, usually a signal that it expects to have no important decision to make public.

The mood of nervous expectation in the currency market saw pressure lifted from the French franc, which firmed slightly. It is now nearly three centimes from its floor of Fr3.4305 to the mark.

The punt had a more difficult day. It was pinned to its floor by reports that Bertie Ahern, the Irish finance minister, had hinted that he might consider a devaluation. The Irish central bank bought punts at its floor rate against the ERM's strongest currency, the Dutch guilder.

But Mr Ahern said later that his government 'unequivocally and consistently supported the existing parity of the punt'. He told Irish radio that he 'had no reason for believing that the incoming government would change the resolute policy'. The creation of a new coalition government is expected to be announced next Tuesday, which some dealers believe may herald a devaluation.

Amid rumours that Ireland had already called a meeting of the EC's monetary committee to consider a realignment of the system, the Irish central bank raised its overnight support interest rate from 14 to 50 per cent, making it more expensive for dealers to speculate on a devaluation.

A cut in German interest rates is increasingly seen as the only way to relieve pressure on weaker ERM members. But, with German inflation set to be pushed up to around 4.5 per cent later this month by the new year increase in VAT, and credit expansion still surging ahead, it is widely believed the Bundesbank will not feel able to relax rates for some weeks yet.

The pressure on the central bank to drop its 9.5 per cent leading rate continues to mount, however, as Mr Schlesinger acknowledged in his speech yesterday to industrialists in Oslo.

His response was characteristically unyielding. Noting the persistent impatience in some EC partner countries at the level of German rates, he said that it 'would be wrong if German monetary policy, by focusing on short- term difficulties, be they domestic or among our partners, were wholly to give up a strategy of correcting mistakes made in Germany, or were to accommodate the difficulties of fiscal policy with a lax monetary regime'.

Such single-mindedness came under attack from the Berlin- based DIW Economics Institute, which said that interest rates must come down now and sharply to 'avoid an even steeper economic crash' in Western Europe.

Outside the ERM the pound surged to its highest level since 13 October at its London opening before easing back. It closed 2.31 pfennigs higher at DM2.5184 and 0.46 cents higher at dollars 1.5408. Lingering hopes of a German rate cut saw the dollar rise 0.85 pfennigs to DM1.6350.

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