Pact raises hopes of German rate cut

THE BUNDESBANK'S guarded welcome for the solidarity pact on financing German unification has increased hopes of an imminent cut in interest rates. Economists are predicting a drop of 50 basis points in both the key Lombard rate, currently at 9 per cent, and its discount rate, lying at 8 per cent, when the central council meets in Frankfurt tomorrow.

Otmar Issing, the bank's chief economist, said yesterday: 'It is positive that there is an agreement, that the uncertainty is over.' Reimut Jochimsen, another council member, expressed 'great relief' that the months of debilitating haggling had passed.

Helmut Schlesinger, the Bundesbank's president, had earlier described the ending of the negotiations in Bonn as very important for the German economy and investor confidence.

The establishment of a medium-term plan for securing public finances, under massive strain because of unification, had widely been regarded as the Bundesbank's main outstanding condition for a further relaxation in rates.

With the recession biting hard, inflation is expected to continue sinking slowly, and monetary growth to be weaker. 'The Bundesbank has probably now got the scope it needs to act,' said Hermann Remsperger, chief economist at BHF bank.

However, a possible complicating factor is Sunday's general election in France, given that a rate reduction would boost the franc, and the Bundesbank would not wish to be regarded as interfering. But the domestic pressure for rate relief is now so strong that such external considerations are thought likely to play only a secondary role.