European Central Bank cuts interest rates amid low inflation

Logo_European_Central_BankIn a surprise move, the European Central Bank cut interest rates last week from 0.5 percent to 0.25 percent, joining several other central banks, including the Bank of Japan and Federal Reserve, in setting interest rates close to zero.

ECB President Mario Draghi said the cut reflected an outlook of economic weakness in the eurozone and low inflation. Inflation in the region fell to 0.7 percent in October—the lowest since January 2010. The ECB has attempted to keep inflation just under two percent, BBC reports.

The ECB also cut its emergency borrowing rate to 0.75 percent from one percent and held the rate on bank deposits at zero, according to Reuters.

The interest rate cut is designed to reduce borrowing costs for banks, and, subsequently, businesses. While the eurozone posted a 0.3 percent increase in GDP, unemployment remains high and austerity measures in some countries have restrained growth, BBC reports.

Draghi said the ECB expects to see a “prolonged period” of low inflation, followed by a gradual upward shift in inflation to below but close to two percent, adding that the bank’s economic policy will “remain accommodative as long as necessary,” according to the BBC.

“We have a whole range of instruments to activate before reaching the lower bound … in principle we could even cut further the interest rate,” Draghi said, Reuters reports.

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