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U.K. rates cut 0.50 percent
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November 5, 1998: 8:49 a.m. ET
Germany and France hold the line as U.K. rates are cut sharply
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LONDON (CNNfn) - The Bank of England caught the market off-guard Thursday, slashing its repo rate 50 basis points to 6.75 percent as the Bundesbank elected to keep interest rates on hold in Germany.
The Bank of England's decision took the market by surprise on a frenzied day for European interest rates.
The German repo rate was maintained at 3.30 percent and the Bank of France left its intervention rate unchanged at 3.30 percent.
Denmark's central bank cut its securities repurchase (repo) rate, to 4.40 percent from 4.65 percent earlier Thursday.
The Bank of England's decision was ahead of market expectations of a 25 basis point reduction.
The FTSE jumped an immediate 30 points on the news, but dived about 130 points by mid-session, to 5,490.2.
"It would seem the bank now realizes that we are falling into a bit of a deep hole," said Enskilda Securities European strategist Jerry Evans.
The bank's assessment of the U.K. economic situation was dire. It promised a revised growth and inflation forecast next week.
"News about the international environment and the prospects for domestic activity have led the (monetary policy) committee to moderate its forecast for growth next year and to revise downwards its projection for inflation over the next two years," the bank said in a statement.
"As a result, the committee concluded that a reduction in interest rates of 0.50 percent was appropriate in order to maintain a path for inflation consistent with the target."
Economists were divided on what the decision meant for U.K. interest rates in the months ahead.
HSBC Securities U.K. economist Adam Cole said this "bold move" from the bank would probably its last until the New Year. "I suspect rates are probably on hold for a month or so," he said.
But Standard Chartered Bank treasury economist Claudio Piron predicted more and deeper cuts in the coming months.
"We are looking at a more aggressive trajectory in cuts than previously," he said. "The market's reaction is that we will probably get another 25 basis point cut at the next monthly meeting."
Piron said the bank was obviously upbeat about a lack of inflationary pressures. Lower rates would weaken sterling, push up the cost of imports which would feed through into the retail prices index, he said.
Sterling fell a pfennig against the mark on the decision and more than half a cent against the dollar.
Though the scale of the bank's cut surprised economists and traders, two separate surveys had earlier underlined the fact that the U.K. economy was in need of a boost.
Employers organization the Confederation of British Industry said British retail sales fell in October while official government figures on British manufacturing output showed a larger-than-expected 0.4 percent fall.
German rates on hold
The Bundesbank's decision to leave rates unchanged disappointed the new German government, but was very much in line with market expectations.
The Buba meeting is likely to have been a stormy one. New German Finance Minister Oskar Lafontaine, who participated only as an observer, has been an increasingly vocal critic of the Bundesbank's monetary policy in recent weeks, worrying financial markets that he is interfering with the central bank's independence.
Enskilda's Evans said rates in the other countries participating in European Union would now have to reflect the German bank's decision.
"Europe is one," he said. "Central banks cannot act independently."
Frankfurt's Xetra DAX index lost 104 points in lunch time trade while in Paris the CAC 40 index was down 67 points at 3,617.
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