Rates slashed across Europe

ECB surprises with half-point reduction to 2.5%

THE EUROPEAN Central Bank last night wrong-footed its critics and delighted the markets with a surprise 0.5 percentage point cut in interest rates.

The move, the ECB's first since formally taking control of European monetary policy at the beginning of the year, takes interest rates in the euro- zone down to just 2.5 per cent, less than half their level in the UK.

Wim Duisenberg, ECB president, said the cut had been approved by a "very large majority" of the bank's governing council. "My message is that today's measures should increase the confidence of the man in the street in the ECB as a guardian of their values."

Market analysts cheered the decision, although the euro fell below $1.08 after briefly spiking higher following the cut.

European stock markets had already closed by the time the ECB announced its decision, but the move is expected to send equities soaring when markets re-open today

"They've done the right thing, although I'm surprised they've bitten the bullet like this", said Sharda Persaud at Paribas. Alison Cottrell at PaineWebber said: "It looks like they're following the central bank mantra that rates should be as high as necessary, but as low as possible".

Comments from Mr Duisenberg suggested that last night's surprise decision would mark the end of the current rate-cutting cycle in Europe. He told reporters: "We wanted the move to be as convincing as possible because we were afraid a smaller move would only have led to expectations for the future."

Neil Parker at Royal Bank of Scotland said: "I think that the ECB is sending a message to Europe's governments that any further lobbying will fall on deaf ears."

The ECB's decision was triggered by a combination of economic and political pressures, according to analysts.

On the economic front, business confidence has fallen sharply in the euro-zone since the beginning of the year. There have also been particular concerns over the outlook for Germany, although Mr Duisenberg stressed last night that the move was not aimed specifically at any one European country.

Political factors included both the departure four weeks ago of Oskar Lafontaine - the former German finance minister whose calls for interest rate cuts infuriated ECB officials - and behind-the-scenes pressure from both the IMF and the OECD.

The next summit of G7 finance ministers and central bankers, due to take place later this month at the spring meetings of the IMF and the World Bank, is also thought to have been a significant factor.

Ms Cottrell said: "The ECB might have wanted to cut before the IMF/World Bank meetings so they don't get the Americans breathing down their necks."