Pressure for an early reduction in Irish interest rates is continuing to build, with the Bundesbank president, Dr Hans Tietmeyer, warning states participating in European Monetary Union to start taking steps toward interest rate convergence sooner rather than later. Irish wholesale market rates are three percentage points above German levels and the Central Bank is expected to start moving rates here down over the coming weeks.

Dr Tietmeyer confirmed the widespread view that the rates inside monetary union are likely to converge at the current German levels. He noted that larger countries would play a greater role in determining the first European interest rate.

"The so-called hard-core countries will undoubtedly play a sort of benchmark role," he said. "Convergence in the lower level of the interest rate gap is certainly from today's perspective more likely than at the current average level."

Wholesale market interest rates in EMU countries currently range from 3.30 percent in Germany to over 6 per cent in Ireland.

Sources in Dublin believe that the senior management at the Central Bank of Ireland will be in touch with the other states preparing to join monetary union and fully accept that Irish rates must converge with the rest by the end of the year.

However the timing of the reductions remains a closely guarded secret, with the bank likely to want to ensure that they do not cause undue disruptions in the money market. Given the large amount by which rates here must fall, it seems likely that the bank will announce the first reduction later this month or early on October.

In a speech to be delivered in Lucerne, Switzerland, Dr Tiet meyer said that participating national central banks must start to get used to the idea that the European Central Bank (ECB) would control monetary policy from 1999.

"The national central banks must increasingly adjust to this and in the time that remains edge closer to a common interest rate level," said Dr Tietmeyer, who is also a member of the ECB's governing council.

"For one thing is clear: The longer the convergence of central bank rates is delayed, the larger the steps taken at the end of the year or the start of next year will be."

Turning to policy making, Dr Tietmeyer said the ECB was close to choosing a monetary policy strategy, saying that money supply should plan a key role at the bank.

The Bundesbank chief said he favoured money supply in ECB strategic planning but that at least early on in the ECB's life, it should look at other indicators.

"In view of the possible large volatility in money supply developments in the start-up period, it would be advisable to carefully watch other factors," Dr Tietmeyer said. ECB has said it is working intensively on developing a monetary policy strategy upon which it will base interest rate decisions once the euro is launched.

Members of the governing council have said that they were likely to base policy on a combination of money supply aggregates and inflation targeting.