EUROPE FOCUS Spain Cuts Rate, Eyes On Other Central Banks

By Robert S Duncan

3 November 1998

Dow Jones International News

The Bank of Spain's decision to lower its benchmark interest rate 25 basis points to 3.50% Tuesday looks likely to be the first in a new round of euro-zone rate cuts, analysts said.

Following the rate cut, the Spanish peseta (ESP) weakened slightly against the Deutsche mark. At 1145 GMT, the mark was trading at ESP85.02, up from ESP85.01 earlier in the day and ESP85.00 late Tuesday.

Analysts agreed that the next European rate cut could come soon...in fact possibly later this session.

The market will be closely watching the Bank of Portugal later Tuesday, which at 1415 GMT is expected to announce whether or not it will cut its key repo rate from the current 4.0%.

Many central banks in the euro zone need to lower their key interest rates before the European single currency is launched next year. Most market watchers expect the new currency to come into life with an interest rate somewhere between 3.00% and 3.30%.

However, the Bank of Spain's decision to cut rates so soon after its last cut surprised the market, not least because it's the first time the central bank has implemented its new weekly repo schedule, doing away with its previous seven-to-13 day calendar. The bank said that in the future it will set the repo rate on Monday, with the auction on Tuesday and settlement on Wednesday. However, this week's auction was put back one day due to a Madrid holiday on Monday.

The Spanish central bank's cut mirrored a similar move in Sweden, where the Sveriges Riksbank cut its one-week fixed securities repo rate to 3.85% from 4.10%.

"I was caught by surprise," said Henrik Lumholdt, an analyst at Bank of America in Madrid. "It's surprising that it (Spain's rate cut) was sooner than we expected. That suggests that you have to look at this in a pan-European context."

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