Business, Economics and Jobs

European Central Bank cuts interest rates to record low


The euro logo is seen in front of the European Central Bank in Frankfurt, Germany, on April 4, 2013.

The European Central Bank slashed its main interest rate to a record low on Thursday as policymakers attempt to spur economic activity and prevent the eurozone from slipping back into recession. 

The benchmark refinancing rate, which is the rate at which the central bank lends money to commercial banks, was cut to 0.25 percent from 0.5 percent.

The hope is that banks will pass on the savings to their customers in the form of lower lending charges, making it easier for consumers and businesses to borrow money, which should, in theory, boost investment and create jobs.

The news caught most investors by surprise: stocks rallied, bonds surged and the euro sank. It follows the release of data showing the eurozone inflation rate at 0.7 percent in October, the lowest level since Nov. 2009 and well below the ECB’s target of 2 percent. 

"I would characterize the discussion today as being wholly in agreement about the need to act," ECB President Mario Draghi said after the 23-member governing council meeting in Frankfurt.

Draghi also left the door open for further interest rate cuts, noting inflation could remain low for a “prolonged period.”

While low inflation can mean higher real wages, it is also a sign of slowing economic growth, weakening demand and falling investment.

Draghi, who took the helm of the ECB in Nov. 2011, has shown a greater willingness to lower interest rates than his predecessors. 

But most investors had expected the ECB to hold fire on interest rates this month until December when staff forecasts for economic growth and inflation are due to be published.

Thursday’s unexpected decision highlights the degree of concern among European policymakers about the eurozone’s fragile recovery. The region emerged from its longest-ever recession in the second quarter, but unemployment remains at a record high and the European Commission on Tuesday cut its 2014 economic growth forecast to a feeble 1.1 percent from 1.2 percent.