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SCMP Reporter

The Bundesbank (Buba) yesterday withstood intense political pressure from Germany's newly elected government by refusing to cut interest rates.

 Despite the attendance of Finance Minister Oskar Lafontaine at its policy-making council meeting, the Bundesbank said it would be keeping its key securities repurchase rate - or repo rate - at 3.3 per cent.

  The German central bank's unwillingness to loosen monetary policy came as the Bank of England said it was cutting the cost of borrowing by a higher-than-expected 50 basis points.

 The cut in British rates marks the independent central bank's second consecutive downward move - taken in response to increasing evidence of a lack of consumer confidence. Short-term rates now stand at 6.75 per cent.

 Most analysts believe the Bundesbank had no reason to cut interest rates yesterday.

 'With real interest rates at 2.25 per cent in Germany . . . it does not present any problems to companies in terms of the cost of capital,' said Roger Monson, strategist at Rabobank International.

 German policy-makers also believe the prospect of continued rate cuts elsewhere in Europe is sufficient to keep German demand at an optimum level without fuelling inflation.

 Yesterday, Denmark cut its rates, following reductions this week by Spain, Portugal and Sweden as countries edge closer to the 3.3 per cent convergence rate expected when the euro is launched next year.

 France yesterday said it was keeping its key intervention rate at 3.3 per cent.

 The Bank of England's decision comes in the face of growing concern that Britain is on the brink of recession. Monthly industrial production data yesterday showed a 0.6 per cent decline for September against a forecast 0.2 per cent fall.

 The Bank of England said the risk of inflation had subsided as growth prospects had become subdued in line with an expected global slowdown.

 It said: 'The [monetary policy] committee concluded that a reduction in interest rates of 0.5 per cent was appropriate.'  In contrast, the Bundesbank's refusal to cut rates reflects policy-makers' determination to launch a strong euro and to give the responsibility for further rate cuts to the European Central Bank.

 Political pressure to move rates has been gathering pace in Germany, with Economics Minister Werner Mueller and the country's trade union umbrella organisation backing Mr Lafontaine's calls for lower rates.

 All fear the global slowdown will lead to rise in unemployment and a reduction in economic activity.

 The Bundesbank has responded by fiercely protecting its independence - a stance that prompted the government to deny it was seeking to influence monetary policy.

 The statement, which came from Chancellor Gerhard Schroeders office, did urge, however, the monetary authorities to seek to stimulate economic growth wherever that did not clash with the aim of monetary stability.



Buba resists pressure for cut in rates