Thursday, December 3, 1998 Published at 19:55 GMT
Euro banks cut rates
The Bundesbank has been under political pressure to cut rates
Central banks across Europe have cut interest rates to 3% in the first co-ordinated move to boost growth in the countries that will join the single European currency in less than a month.
European stock markets surged on the news, with the DAX index of leading shares in Frankfurt closing up more than 2% after the announcement.
Despite the cut in rates, European currencies stayed strong against the dollar, indicating that the euro will be launched as a strong currency in Janaury. Usually rate cuts make a currency less attractive to hold.
Germany leads the way
Instead, Germany's central bank, the Bundesbank, led the way by dropping the country's key interest rate from 3.3% to 3%.
President of the Bundesbank Hans Tietmeyer said the bank decided to cut the rate because of fears over joblessness and lack of economic growth.
The Bank of Italy however only cut its rate from 4% to 3.5%.
The European Central Bank said the co-ordinated cut had effectively set the European rate level for the start of monetary union on January 1.
It said it expected to maintain the rate for the 'foreseeable future' when it takes over the running of monetary policy from the central banks.
In order for that to happen all 11 eurozone countries must have the same interest rate.
Hans Tietmeyer stressed that the decision was "not dramatic and is uninfluenced by political pressure."
The German government has said growth, hit by the Asian and Russian economic crises, will shrink to 2% in 1999 from this year's expected rate of 2.75%.
New German Finance Minister Oskar Lafontaine had repeatedly called for the Bundesbank to lower interest rates to stimulate economic growth and fight unemployment.
But Mr Tietmeyer and other Bundesbank officials have criticised Mr Lafontaine for trying to influence the central bank, which has a political mandate to be independent.
The decision to cut rates will put further pressure on the Bank of England to also reduce its rate at the meeting of its monetary policy committee next week.