k

--Interest rates to converge around 3.75%-4.5% in runup to
EMU--
--Central banks will hold off convergence for as long as
possible--

Økonomer venter, at euro-renterne ved årets udgang vil ligge mellem 3,75 og 4,50 pct

London-May 1-FWN--THE APPROACH TO EUROPEAN ECONOMIC
and monetary union (EMU) could spring some surprises on
interest rates, but the general pattern of convergence
should be undisturbed, analysts said.

I'M CURRENTLY CONDUCTING A SURVEY ABOUT EURO RATES

(CAN I ASK YOU A QUESTION?)

WHAT ARE YOUR forecasts for euro interest rates at the end of the year?

Will this weekends haggling about the ECB-presidency harm the credibility in the euro?

(undermine confidence in the project)

range from 3.75% to 4.5%, but they are

agreed that the most important factor for European economies
is that rates are converging, rather than where they
converge.
Differing views on economic growth in core Europe, and
how far the Bundesbank will be prepared to lift German rates
to bring them in line with the European peripheral economies
such as Italy and Spain, have led to the differing opinions
on final interest rate levels.
Although Germany and France, with their lackluster
economic growth, would be happy with interest rates at the
current German level of 3.3%, fast growing economies such as
Spain, Ireland, Finland and the Netherlands would like to
see rates at a higher level.
Recent comments by Bundesbank (BBK) president Hans
Tietmeyer gave the markets cause to speculate the BBK may be
prepared to raise rates to meet those on the periphery.
Tietmeyer said the level of interest rates in EMU depend on
developments across the euro area. He also said European
central banks must look even more at the European context
after this weekend's summit.
German bonds sold off on the implication that German
rates will have to rise to satisfy the whole euro area.
However, other BBK council members have been calling for
German interest rates to be kept on hold, saying there is no
domestic reason for a rate hike.
The BBK kept rates on hold after its central council
meeting Thursday. Although there has been some speculation
that it will raise rates soon after the weekend's euro
summit, most analysts think a rate hike is more likely from
June.
DKB International Chief Economist Gerard Lyons said he
expects interest rates to converge close to the current core
Europe level. He said the higher yielding European countries
make up only one-sixth of the euro-area gross domestic
product, while Germany by itself makes up one third. With
the German economy still weak, there is little reason to
hike rates, he said.
End of Part 1

(c) Copyright 1998 FWN

FWN: 052632 GMT

EMU Rate Convergence Near 3.75-4.5%, Few
Surprises: Pt 2

Lyons predicts rates will converge at around 3.75%. He
said bringing down peripheral euro countries' rates this low
would certainly highlight the differing needs of the various
euro economies, but would not put too much strain on the
whole EMU system.
Alison Cottrell, chief international economist with
PaineWebber, said core Europe is likely to see rates at 3.8%
by year end, as rates above this would be politically
unacceptable for France, but at their current level they
would be too low for the Netherlands and other quickly
growing economies.
She pointed out, though, that any predictions made on
interest rates are assuming that U.S. rates remain on hold.
Nikko Europe chief European economist Julian Jessop, in
contrast, said rates should be between 4% and 4.5% by year
end, as the BBK would move to avoid a situation where the
European Central Bank (ECB) would have to raise rates as
soon as it took control of monetary policy.
"The BBK will not want the ECB to be left with a poison
chalice," Jessop said.
He said German rates will have to rise anyway as the
economy gathers speed, while short-term rates are not as
important as long-term rates for the German and French
economies.
As for Italy, Jessop said the question of where rates
end up is dwarfed by the benefits of being in EMU.
Although analysts know that no matter what the level,
interest rate convergence will have taken place by the end
of the year, there is still uncertainty about what the time
profile will be. The Bank of Italy has already surprised the
market by announcing a 50 basis cut in its discount rate
last week.
Lyons said the bulk of the rate convergence should take
place in the fourth quarter, with most central bankers
preferring later rather than sooner.
Lyons said it made sense to delay a "one size fits all"
interest rate policy for as long as possible. Countries like
Ireland and Spain, whose economies are growing strongly,
will wait till the last moment to cut rates, in order to
prevent their economies from overheating.
Cottrell agreed that European central bankers would
want rate convergence as late as possible.
However, analysts said it was not when rates were cut,
but rather the level they were cut to, and what the ECB
would do after Jan. 1, 1999, which would determine how the
bond market reacted.
Jessop said with economic growth across the euro area
picking up, and the possible risks surrounding EMU, bonds
should perfrom poorly until the end of the year, and into
1999 if the ECB aggressively hikes rates.
He said there is the possibility of gains from yield
convergence between European bonds, but this is "a matter of
only basis points."
End

(c) Copyright 1998 FWN