ECB slashes interest rates to record low as inflation drops

THE EUROPEAN Central Bank (ECB) made the shock decision to cut its benchmark interest rate to 0.25 per cent yesterday, the lowest level in the currency union’s history.

Despite widespread predictions that the ECB would hold policy stable, president Mario Draghi offered up the first rate cut for the Eurozone in over a year.

The surprise change sent the euro tumbling against sterling, plummeting by more than one per cent during the day, down to just above £0.83, before paring its losses to end down 0.72 per cent.

Inflation in the euro area fell to 0.7 per cent last month, spurring the action. An economic forecast by the EU earlier this week also predicted that unemployment would not fall during 2014, piling pressure on the ECB to act.

Berenberg’s Holger Schmieding commented: “The cut may help a little. Most importantly, the ECB sends a message that it takes the still rather hypothetical deflation risk seriously.”

Eurozone inflation is running at a much lower level than the UK’s rate, which is the highest in the European Union. French and German prices rose by only one and 1.6 per cent respectively in the year to September.

Inflation in the euro area has also plunged in the past year, from 2.5 per cent in October 2012 to 0.7 per cent this October 2013. In comparison, UK inflation remains at 2.7 per cent, exactly where it was a year ago. The Bank of England yesterday held rates at 0.5 per cent, in line with expectations.