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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.

The BBC's Peter Morgan: "Central Bank cuts leave Britain on the sidelines"
The move follows a meeting of the European Central Bank on Tuesday night. After that meeting, Wim Duisenberg, president of the ECB, said that the bank would do "its utmost" to help solve Europe's unemployment problem.

European stock markets surged on the news, with the DAX index of leading shares in Frankfurt closing up more than 2% after the announcement.

Marian Bell from the Royal Bank of Scotland: "A big surprise"
"We're bound to be happy at first," said one trader, "but it is worrying that it was such a surprise."

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

The BBC's Jonathan Charles: "New European Central Bank has made history"
European interest rates were expected to converge at 3.3% until after the single currency was launched at the beginning of 1999.

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.

[ image: Hans Tietmeyer:
Hans Tietmeyer: "Not a dramatic decision"
The Bank of France also cut its repo rates from 3.3% to 3% and it was followed almost immediately by most of the other countries due to take part in the launch of the single currency.

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.

Political pressure?

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.

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