ECB cuts interest rates to record low

ECB headquarters The ECB's move came as a surprise to many analysts

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The European Central Bank (ECB) has cut its benchmark interest rate to a record low of 0.25%, down from 0.5%.

The move came as a surprise to many analysts.

ECB president Mario Draghi said the decision to cut rates reflected an outlook of low inflation and economic weakness in the eurozone.

Inflation in the eurozone fell to 0.7% in October - its lowest level since January 2010, stoking concerns of deflation in some countries.

Prices in Greece - one of the eurozone members worst hit by the economic crisis - have not risen since July. Some economists are also worried about deflation in Spain.

The ECB's target is to keep inflation just below 2% - seen as a healthy level for economic growth.

'Weak economic activity'

Speaking at a press conference after the announcement of the rate cut, Mr Draghi said the bank expected to see "a prolonged period of low inflation followed by a gradual upward movement towards inflation rates of below but close to 2%", and said the eurozone was seeing "weaker than expected economic activity".

Start Quote

It is not the inflation rate of 0.7% itself which the ECB sees as a worrying and dangerous thing, but the pronounced downward trend in the rate - from 1.6% just four months ago”

End Quote

"Accordingly, our stance will remain accommodative as long as necessary," he said.

He reiterated a pledge to keep rates low for the foreseeable future as part of the bank's new policy of offering forward guidance alongside its decisions.

"Deflationary risks and the stronger euro seem to have motivated the ECB's move," said Carsten Brzeski, an analyst at ING.

"It is obvious that the ECB under president Draghi has become much more pro-active than under any of his predecessors."

Rates had been held at 0.5% since May, and before that were cut to 0.75% in July 2012.

The cut in the benchmark rate is designed to make it cheaper for banks to borrow from the ECB, with the aim that this will be passed on to businesses taking out loans, boosting the economy.

Euro v US Dollar

Last Updated at 01 Aug 2014, 06:10 ET *Chart shows local time EUR:USD intraday chart
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The 17-member eurozone returned to growth in the second quarter of the year, recording a 0.3% increase GDP. But unemployment remains high and austerity measures in a number of countries continue to hold back growth.

The euro fell sharply against the dollar in response to the decision, dropping more than 1%.

A weaker euro may be a help to the eurozone economy by making European goods cheaper abroad, benefiting exporters.

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