French rate cut boosts UK shares: Germany suggests delay in plans for European monetary union

THE BANQUE de France yesterday tested the waters for lower interest rates with its first reduction in official rates since the demise, in effect, of the European exchange rate mechanism last week.

The move, which helped to push London shares to a new high on hopes of an interest rate cut, came as Helmut Kohl, the German Chancellor, suggested that EC leaders could agree to delay full monetary union until the next century.

Mr Kohl said that it was vital to preserve the convergence criteria of the Maastricht treaty on inflation and budget deficits. 'If that should lead to a one or two-year delay in the existing schedule, I ask myself, what would that change on the main issue?', he said.

In an interview with German television broadcast last night, Mr Kohl rejected allegations that Germany had isolated France during the recent upheaval on European currency markets. The Chancellor revealed that France had suggested that the mark should leave the ERM in order to save the system, but the proposal was vetoed by the other ERM member states.

Commenting on French moves to save the ERM, the German Chancellor rejected suggestions that Bonn had lobbied other members of the ERM to reject the French proposal. 'We did not isolate the French, if the French made the proposal - let us not beat about the bush - that the mark should leave the system for a while, then that was a matter for the French,' Mr Kohl said.

He said he had predicted that other ERM members would reject the idea. In the event he was proved correct.

The Maastricht treaty calls for the third and final stage of European monetary union to begin in 1997 or 1999 at the latest and Mr Kohl said he wanted the special EC Summit, in October, to review the EMU schedule.

The French decision to cut rates coincided with a growing equity market view that a further cut in British bank base rates was inevitable. The FT-SE 100 index climbed 16.6 points to close at a record 2986.4. The Banque de France cut its 24-hour securities repurchase rate, one of the ceilings for French money market interest rates, by a quarter point to 9.75 per cent.

The decision suggests that the French authorities want to push money market rates down towards the key intervention rate, now 6.75 per cent, before announcing reductions in this key rate in the weeks and months ahead.

But the French franc weakened early yesterday in anticipation of lower rates and failed to recover after the announcement was made. It fell by 1.8 centimes to a closing Fr3.5075 to the German mark and compared with its former ERM floor of Fr3.4305.

In the currency markets, most analysts expect the Banque de France to adopt a cautious policy towards cutting rates, partly because it wants to replenish its exhausted foreign currency reserves.

The reaction of the franc yesterday indicates that France is likely to await the next decision on monetary policy from the Bundesbank, which holds its council meeting on 26 August, before it demonstrates that it remains a member of Europe's 'hard' currency club alongside the mark, the Dutch guilder, the Danish krone and perhaps the Belgian franc.

However, a cut in the 5-10 day repurchase rate, may be just days away. This rate, another ceiling on French money market rates, stands at 10 per cent and must be pushed lower if market rates are also to edge down.

It is understood meanwhile that the British Treasury has begun an internal review of its original proposal for a common European currency as one route to an eventual single EC currency. This may indicate that John Major will attempt to bolster Britain's influence in the ERM/EMU debate at the Brussels summit.

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