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Big week for Europe's rates
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November 2, 1998: 7:14 a.m. ET
Rates set to fall in London, but the Bundesbank will likely hold the line
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LONDON (CNNfn) - Interest rates will be the main theme in Europe again this week. All eyes will be on the Bank of England and the Bundesbank Thursday, when they announce their decisions.
The Bank of England's Monetary Policy Committee (MPC), which sets interest rates in the U.K., is due to begin its two-day monthly meeting Wednesday, with the results released around mid-day Thursday.
The Bundesbank Council has its bi-weekly meeting Thursday. The consensus among observers is that rates in Germany will remain steady. However, the decision by Oskar Lafontaine, Germany's new finance minister, to sit in on the meeting has caused some debate.
Action is much more likely at the MPC meeting in London. Observers say a 25 percentage point reduction is already factored into the market.
"There is such intense pressure on them (the MPC members), they will have to cut", according to Richard Jeffrey, group economist at Charterhouse Bank.
Jonathan Loynes, U.K. economist at HSBC Securities, agreed the one-quarter point cut is more likely, but he says "it's getting close" for a 50 percentage point fall. He points to a purchasing managers report out Monday, which was described as "exceptionally gloomy" for the manufacturing sector.
The difficulty for the MPC is that economic surveys have been extremely weak recently, "but the economic numbers don't support those surveys", said Charterhouse's Jeffrey.
Also complicating matters is chancellor Gordon Brown's draft budget proposals, due to be announced Tuesday.
Analysts describe likely measures as "tinkering", and say the most important event will be the reduction in the government's growth forecast. The U.K. Treasury is expected to change its growth forecast for next year to about 1 percent, down from 1.5 percent.
Measures announced will probably include an additional tax on cars with larger engines.
The attendance of Lafontaine at the Bundesbank meeting has caused some stir, but analysts in London pooh-poohed reading too much into that.
"There's always a chair spare for the finance minister", said Claudio Piron, treasury economist at Standard Chartered.
Economists say the German economy shows few signs of needing support from a rate cut, and lower rates in Germany would merely complicate matters for other European central banks in the run-up to European Monetary Union.
Rates must converge around Germany's level by year end, so if the Bundesbank cuts rates then countries such as Spain, Italy and Ireland will have to reduce their rates even more.
"The Bundesbank will never cut rates again", said one analyst, referring to the fact that responsibility for monetary policy transfers to the European Central Bank in January.
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