The European Central Bank has cut the cost of borrowing in the eurozone to a new record low with the region’s economic recovery still weak.
The Bank’s main interest rate falls to 0.25 percent.
The cut sent the euro sharply lower, boosted government bond prices and saw the region’s share markets hit fresh five-year highs.
It is the second reduction this year; in May the benchmark rate – which affects how much people pay for loans – was reduced to 0.5 percent.
The move by Bank President Mario Draghi and his policymakers surprised many in the financial markets and highlights the ECB’s concern about the slowdown in eurozone inflation.
The decision comes after a shock slump in eurozone inflation.
In October it was at 0.7 percent. That is far below the ECB’s target which is just under two percent and it has sparked fears the eurozone’s economic recovery could stall.
“We may experience a prolonged period of low inflation to be followed by gradual upward movements towards an inflation rate of below but close to two percent later on,” ECB President Mario Draghi told a news conference.
The feeling in the market is that a rate cut will do little to boost the economy or fight deflation, but will weaken the currently strong euro, which can help exports.
“Deflationary risks and the stronger euro seem to have motivated the ECB’s move. It is obvious that the ECB under president Draghi has become much more pro-active than under any of his predecessors,” said ING economist Carsten Brzeski.
Calls from government ministers and industry – the loudest from Italy – for the ECB to loosen policy to help bring down the euro’s exchange rate had also put pressure on the ECB Governing Council.
Italian Prime Minister Enrico Letta welcomed the rate cut. “It shows the ECB cares about growth and competitiveness in Europe,” Letta said, adding that it would allow a “re-balancing” of the euro-dollar rate which had been “a source of difficulty in recent months”.
There was a similar positive response in Ireland. The country is a eurozone success story as hours before the ECB announcement it got the green light to exit its bailout programme after years of austerity.
“We wanted interest rates to go down and it helps our position going back into the markets because the spreads in Europe should narrow now,” Finance Minister Michael Noonan said.
“The interest rate reduction and the suggestion that the currency level might go down a little would both help our exports and help our economy to grow.”