PARIS — France trimmed a short-term interest rate Monday, the first sign that last week's loosening of Europe's exchange rate system could lead the Continent's recession-plagued nations to stimulate their economies.
However, the cut was immediately followed by a weakening of the French franc against the German mark--which could forestall additional rate cuts.
The Bank of France said it was cutting its rate for 24-hour loans to banks to 9.75%, from 10%. Traders viewed the rate cut as the bank's gradual approach to easing its grip on interest rates.
The move followed last week's decision by the European Community to widen the fluctuation bands within its Exchange Rate Mechanism, which is designed to keep currencies stable in relation to each other.
After the decision, and a cut by Germany in short-term interest rates, the franc rose against the mark. But it began slipping again Monday, and closed at 3.506 francs per German mark in New York, up from 3.491 on Friday.
The Paris stock market, which had rallied to record levels last week in anticipation of rate cuts, eased on Monday. The CAC-40 stock index slipped 11.31 points to 2,138.52.
But some other European stock markets continued to gain on rate-cut expectations. London's FTSE-100 index surged 16.6 points to a record 2,986.4. In Frankfurt, the DAX-30 index added 2.92 points to 1,872.30.
The EC decided last Monday to allow currencies to fluctuate by as much as 15% against each other rather than 2.25%, a decision that observers said amounted to a de facto abandonment of the ERM.
The decision helped end speculation that had pushed down the value of the franc and other weaker currencies. But it also set back efforts to create a single EC currency and a monetary union by decade's end that is designed to create a European trading bloc.
France and other EC countries beset with high unemployment need to cut interest rates to stimulate their economies, but that makes their currencies less attractive for investments.
Germany has been criticized for keeping its interest rates high, fighting inflation caused by the high cost of unification at home. These high rates have forced Germany's EC partners to refrain from interest rate cuts as well.
German Prime Minister Helmut Kohl rejected claims that the monetary system is doomed, but acknowledged that the currency turmoil could delay single currency plans by as much as two years.