The European Central Bank cut interest rates to a record low on Thursday in an attempt to arrest a slump in inflation that has threatened to stall the eurozone’s fragile economic recovery.
The ECB’s 23-man Governing Council cut the bank’s headline interest rate to 0.25 percent and its emergency borrowing rate to 0.75 percent, both a 0.25 percent cut. However, the interest rate on the bank’s deposit facility remains at zero.
The surprise move comes after inflation across the eurozone fell to 0.7 percent in October – far below the ECB’s target of 2 percent. Financial markets were taken by surprise with the euro quickly falling to its lowest level against the US dollar for two months.
Addressing reporters at a press conference on Thursday (7 November), ECB boss Mario Draghi confirmed that the rate cuts were a response to possible deflation.
“We expect that there will be a protracted period of low inflation,” he said.
The rate cut was backed by a majority, but not unanimous support, with Draghi commenting that council members were “wholly in agreement about the need to act, but there were disagreements about when to act”.
Draghi also confirmed that the ECB’s headline rates would “remain at present or lower levels for an extended period of time” and mooted the possibility of further cuts, commenting that “in principle we could even cut further.”
The rate cuts are also an attempt to make European exports more attractive by weakening the value of the euro.
EU countries, particularly the bloc’s crisis countries, have taken steps to focus their economies on exports rather than consumption as part of their austerity programmes, but have been hampered by a lack of demand for their goods.
“Euro area economies should gradually benefit from increasing demand for exports,” noted Draghi.
The ECB had “surprised most analysts, including us,” said Carsten Brzeski, chief economist with Benelux banking giant ING.
“It is obvious that the ECB under President Draghi has become much more pro-active than under any of his predecessors,” he added.
For his part, Italian Prime Minister Enrico Letta, who has led demands for a rate cut, said that the move demonstrated that “the ECB cares about growth and competitiveness in Europe”.
Meanwhile, Sharon Bowles, the chair of the European Parliament’s Economic affairs committee, welcomed what she described as “the ECB’s readiness to act quickly,” adding that “fragile growth and lower inflation warrant this rate cut.”
It is good news that the ECB sticks to its forward guidance, which the markets have been demanding. If, as a side effect, this brings down the value of the Euro that will be all the better for our exports,” she said.