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ECB's surprise rate cut

November 7, 2013

The European Central Bank has decided to heed some economists' call to further cut its main financing rate. Low inflation levels prompted the central bank to step into action to support nascent economic recovery.

Mario Draghi, President of the European Central Bank (ECB REUTERS/Kai Pfaffenbach

ECB's surprise rate cut

At a regular meeting of the ECB's 23-member Governing Council in Frankfurt, the central bank on Thursday bowed to intense pressure from some economists and policy makers to cut interest rates.

The ECB decided on a 25-basis-point cut of its main financing rate to an historic low of 0.25 percent, down from its previous all-time low of 0.5 percent. The majority of analysts had believed the bank would not take any such action before its December meeting when it was due to issue its own inflation and growth forecasts.

The cut came in response to a marked drop in inflation in the euro area to 0.7 percent in October, which took the increase in consumer prices to a level well below the ECB's target of keeping inflation close to, but less than, 2 percent.

Stubbornly high unemployment of 12.2 percent had also been a headache for market pundits.

Euro down, shares up

The ECB wants the double whammy of a lower euro and a boost to inflation," HSBC economist David Bloom told Reuters news agency. "We wanted a stronger response to the stronger euro, and we've got it."

The ECB had faced calls particularly from Italy and France to ease its policy in response to the euro strength.

As a matter of fact, the euro fell sharply after the move to $1.3397 from $1.35 prior to the announcement.

The central bank also lowered its emergency borrowing rate to 0.75 percent from 1.0 percent previously, while holding the rate it pays on bank deposits to 0 percent.

hg/hc (Reuters, AP, dpa)