Shock as ECB cuts interest rates to a record low of 0.25 per cent

Stronger euro and fears of deflation thought to be behind surprise move

The European Central Bank slashed interest rates to a historic low of 0.25 per cent yesterday as Frankfurt policymakers reacted with unexpected force to the prospect of deflation gripping the single currency bloc.

The decision from the ECB's governing council to reduce its benchmark lending rate by a further 25 basis points caught financial markets off guard despite the fact that annual consumer price inflation dipped to just 0.7 per cent across the eurozone last month.

At a press conference, ECB president Mario Draghi forecast a "prolonged period of low inflation" for the eurozone. He revealed that the rate cut had not been unanimous, but added that the council had been "wholly in agreement of the need to act".

Most economists had expected no rate cut to be announced by the traditionally conservative Frankfurt-based central bank.

"Deflationary risks and the stronger euro seem to have motivated the ECB's move," said Carsten Brzeski of ING. "It is obvious that the ECB under Mario Draghi has become much more pro-active than under any of his predecessors."

The unexpected cut sent the euro tumbling by around 1.4 per cent against the dollar to $1.3378. The 17-member currency bloc emerged from recession earlier this year after six successive quarters of contraction. But the zone's unemployment rate remains high at 12.2 per cent, with joblessness in Spain and Greece above 25 per cent. The latest dip in the inflation rate to less than half the ECB's 2 per cent target provoked fears of an epidemic of falling prices that could mire the eurozone in stagnation.

"The low rates of inflation leave the single currency area vulnerable to a deflationary episode in the case of a negative demand shock and this is a risk the central bank simply cannot ignore," said Nick Kounis of ABN Amro.

The Bank of England kept its money stimulus programme and interest rates on hold yesterday, as it prepares to overhaul its growth and inflation forecasts next week. Under its forward guidance policy, it has pledged to lock interest rates on hold until unemployment falls to at least 7 per cent, which it forecast in August would not occur until 2016.

But recent stronger-than-expected GDP growth has prompted City traders to expect more rapid gains in employment and to price in a Bank rate rise in early 2015. Next Wednesday the Bank will publish its November Inflation Report, which economists are expecting to reveal higher growth forecasts and a more rapidly falling jobless rate. The jobless rate stands at 7.7 per cent, having declined from 7.8 per cent when the Bank unveiled forward guidance three months ago. The official July-September jobless rate will also be released next Wednesday.

Europe by numbers

0.7% eurozone inflation in October.

12.2% eurozone unemployment in September.

Start your day with The Independent, sign up for daily news emails
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
Life and Style
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own