PARIS Jan 14 The French central bank proposed
on Thursday that the interest rate on regulated, tax-free
savings accounts known as Livret A be trimmed to 1.75 percent
from 2.25 percent currently.
The Finance Ministry usually backs the Bank of France's
proposed rate for the French people's favourite savings product,
but it can overrule the central bank if it sees a risk that a
cut may crimp savers' purchasing power.
The proposal is politically sensitive because keeping
interest rates higher than inflation squeezes banks that offer
the accounts and the Bank of France says it disrupts the
transmission of monetary policy.
Bank of France chief Christian Noyer explained what appeared
to be a compromise in tough economic times that left the Livret
A rate slightly above a 1.5 percent rate which inflation trends
would normally have called for.
In a statement, the central bank said excessive shifts might
confuse holders of such savings products, adding: "Bank of
France governor Christian Noyer considers that exceptional
circumstances justify an exception".
The Bank of France proposed a decrease in the interest rate
following CPI data published on Thursday showing that inflation
excluding tobacco prices, the gauge used by the central bank,
fell to 1.2 percent in December, the lowest since February 2010.
The Socialist government has been pushing savers to use
Livret A accounts, as the money collected through them is
funneled into building social housing.
It has raised the limit savers can put into such accounts by
50 percent to 22,950 euros ($29,900) per account in an effort to
encourage their use.
With savers timid about parking cash in investment funds
exposed to financial markets, the higher ceiling has triggered
record inflows into Livret A accounts with deposits reaching 242
billion euros in November.
The surging inflows presses the banks that offer such
accounts to ramp up their inflation hedging, boosting demand for
French inflation-linked bonds and swaps that track the consumer
Because Livret A interest rates are usually linked to
inflation, they leave banks with liabilities exposed to the ups
and downs in CPI that have to be matched with assets that also
($1 = 0.7667 euros)
(Reporting by Leigh Thomas and Brian Love; Editing by Toby