Investments  

European Central Bank cuts interest rates to 0.25%

The European Central Bank (ECB) has cut its main bank rate from 0.5 per cent to 0.25 per cent.

The rate cut comes as inflation across the eurozone has been tumbling in recent months, raising the prospect of deflation, but the rate cut has been described as a “shock decision”.

It has sparked a rally in European equity markets, with major indices in countries such as France and Germany rising by 1 per cent almost immediately, while the euro plummeted against other developed market currencies.

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Kathleen Brooks, research director at Forex.com, called the move a “shock decision for the markets”.

She said: “It appears that the ECB has taken the side of the weak peripherals who are suffering from signs of deflation, while the core has seen prices remain fairly stable in recent months.”

Ms Brooks said the sell-off in the euro may be due to expectations that ECB president Mario Draghi “will hint towards more radical loosening action in future” in his upcoming press conference.

Neil Williams, chief economist at Hermes Fund Managers, said the 25 basis point cut was “too little, and far too late”.

“The eurozone may be pausing from its fifteen-month recession, but there are reasons to be cautious still on the macro outlook,” he said.

“Admittedly, the second quarter’s 0.3 per cent quarter-on-quarter lift from technical, GDP recession – the first rise since summer 2011 – suggested the worst may be over.

“Encouragingly the ‘core two’, Germany and France, have showed the first in-tandem GDP rises for almost a year. A continuation of this would justify the past year’s convergence of government bond spreads back toward pre-crisis levels, and allay our fears that the euro-zone crisis will enter its second, more critical phase where the macro strains of the periphery increasingly ware on the core countries trying to foot the bill.

“Yet, with financial markets overly sensitised to US stimulus withdrawal – and not the un-fixed euro – rather than a still-unfixed eurozone, they are still worrying about the wrong thing.”

The Bank of England had earlier today announced that it would keep the UK’s main interest rate at 0.5 per cent.