Europe's sluggish economy received a shot in the arm last night when the European Central Bank (ECB) cut interest rates for the euro zone by half a percentage point to 2.5 per cent.
The cut, which comes almost 100 days after the launch of Europe's single currency, was twice the size most analysts predicted and is set to result in cheaper mortgage rates in Ireland.
It will be welcomed in Germany and France, where economic growth has stalled in recent months but the ECB's president, Mr Wim Duisenberg, admitted the decision to cut rates was not unanimous. He declined to say whether Ireland's Mr Maurice O'Connell was among those on the Bank's 17-member governing council who opposed the cut. But Mr Duisenberg insisted that lower interest rates did not represent any danger of inflation for Ireland.
"We do believe that this rate cut will pose no additional threat of inflationary pressure - either in small or in large countries," he said.
Many analysts predicted the Bank would cut rates, but the majority were taken by surprise by the size of last night's cut. Mr Duisenberg said a smaller cut might have given the impression the ECB was embarking on a staged reduction of interest rates and he left little doubt that this cut would be the last for some time.
"We wanted the move to be as convincing as possible. We moved from 3 per cent to 2.5 per cent which is maybe a larger cut than was expected. And now you be sure - this is it," he said.
Last night's decision comes amid worsening economic performance in Europe, especially in Germany and France, which together account for half the total output of the euro zone. Real GDP growth in the euro zone weakened in the fourth quarter of 1998 and confidence in the manufacturing sector deteriorated further.
But Mr Duisenberg conceded that the debate at yesterday's meeting of the ECB's governing council was heated, with central bankers from a number of states opposing any cut in rates.
"We had a very long and very interesting discussion. There were a few who were not very inclined to do something about the rate. A very large majority was inclined to do something. We did not take a vote," he said.
Besides cutting the main refinancing rate by half a percentage point to 2.5 per cent, the ECB cut the marginal lending rate by one percentage point to 3.5 per cent and the deposit rate fell by half a point to 1.5 per cent.
Mr Duisenberg pointed to the persistently low level of inflation in the euro zone, which has remained below 1 per cent for several months, as a further justification for cutting rates. And he brushed off suggestions that the recent weakness of the euro against the dollar represented a threat to the stability of the new currency.
The value of the euro against the dollar leapt upwards by more than 1 per cent on the New York financial market within minutes of the interest rate cut being announced. Germany's centre-left government will be especially pleased by the cut, which many German firms regarded as an essential step towards reviving the country's flagging economy.
The former finance minister, Mr Oskar Lafontaine, angered the ECB with his frequent, strident calls for a rate cut but Mr Duisenberg denied that last night's decision had anything to do with Mr Lafontaine's resignation.
"The interest rates we have established today are valid for the entire euro area and they are founded on conditions in the entire euro area," he said.
