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 price index.
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 follow inflation. ($1 = 0.7667 euros) (Reporting by Leigh Thomas and Brian Love; Editing by Toby Chopra)