Germany to Cut Interest Rates in Surprise Move : Finance: Decision is made under intense pressure. It could rejuvenate global economy, strengthen U.S. dollar.

In a stunning decision, Germany announced Sunday that it will cut its interest rates--a move that could bring down rates worldwide and rejuvenate the ailing global economy.

The move by Germany’s central bank, the Bundesbank, follows months of economic and financial market turmoil in Europe, which has been hard-hit by the Bundesbank’s policy of keeping rates high to battle inflation.

Germany had been under intense pressure from the United States and economically struggling allies in Europe to reduce rates.

The United States also has been victimized by high German rates, which have caused a sharp decline in the dollar’s value against the German mark.

The announcement of the German rate cut was made via the European Community after a round of weekend conference calls, officials said.

The cut will be accompanied by a realignment of the European Monetary System, the framework for keeping order among Europe’s many currencies.

The size of the German rate cut, to be announced today, will be around 1.5 percentage points, according to Italian sources. Short-term German interest rates have been in the 8.75% to 9.75% range.

The move surprised foreign financial markets. In early Asian trading today, the value of the dollar rocketed from 1.44 German marks to 1.50 marks as traders fled the mark in favor of dollars.

As recently as last week, Bundesbank President Helmut Schlesinger insisted that Germany needed to maintain high interest rates to fight inflation, which has surged with the cost of uniting western Germany with the formerly Communist eastern Germany.

Schlesinger said last week that “the German Bundesbank currently sees no room for maneuver to lower rates.”

But the deepening economic turmoil elsewhere in Europe apparently swayed the hand of the normally fiercely independent Bundesbank: Other European nations, forced to match Germany’s high rates or see their currencies devalued, were facing crisis situations.

In a shocking rebuke to the Bundesbank last week, Sweden raised its short-term interest rates from 16% to 75% in a desperate attempt to stop the flight of money from Sweden to Germany.

Italy also raised interest rates on Thursday, and speculation has been rampant that Britain would be forced to do the same.

What’s more, concern has been rising throughout Europe that French voters might reject the all-important Maastricht treaty of European economic integration, which German leaders have strongly supported.

The French referendum will be held Sunday, and the German rate cut is expected to take ammunition away from anti-unity factions who have lambasted the Germans for ignoring their neighbors’ concerns.

With the German rate cut--the first since January, 1990--other European nations will have room to cut their rates, potentially boosting their weak economies. France and the Netherlands indicated Sunday they would follow Germany.

And the United States also could see lower interest rates because of Germany’s decision. Economists believe that the Federal Reserve has been eager to cut rates further to help the stagnant American economy but could not so long as the dollar continued to fall versus the German mark.

Treasury Secretary Nicholas F. Brady said Sunday that the United States is “especially pleased that the Bundesbank intends to reduce interest rates.”

“This is a positive development for world markets and will help fulfill President Bush’s longstanding efforts to ensure the strengthening of world growth.”

In the realignment of the European Monetary System, Italy will devalue the lira 3.5%, while the other nations will follow the German mark and revalue 3.5%. That will mean an effective drop of 7% in the value of the lira when exchange markets open today.

Hamstrung by debt and deficit, the government of Prime Minister Giuliano Amato sought to ease pressures on the lira by raising interest rates last week for the second time in two months.

But the lira continued to come under fierce pressures, forcing central banks to intervene massively to hold it within limits established by the European system. Amato said the Bundesbank’s agreement to revalue the mark and to lower its rates “unblocks the obstacles which have been constraining European economies and which were the source of tensions between currencies.”

The Italian prime minister told reporters that Italy “acted in a strong European spirit and . . . succeeded in finally allowing German interest rates to fall.” Without the German action, he said, Italy would not have devalued.

The devaluation will make Italy’s exports cheaper and its imports more expensive, and officials hope that falling interest rates will help jump-start a sagging economy.

Petruno reported from Los Angeles, and Montalbano reported from Rome.