ECB cuts benchmark rate to 0.05% in surprise move

September 4, 2014, 12:06 PM UTC
Photo courtesy: DANIEL ROLAND/AFP--Getty Images

The European Central Bank surprised financial markets with another small cut in its key interest rates in a fresh attempt to restart economic growth in the 18-country Eurozone.

The ECB cut its key refinancing rate by 0.1% percentage point to 0.05%, a new record low in the euro’s 15-year existence. It also cut its deposit rate by the same amount to -0.20%, meaning that banks will have to pay an even bigger penalty for stashing excess cash away at the central bank instead of putting it to work in the economy.

The move had not been expected by all but a small minority of economists, not least because ECB President Mario Draghi himself had said in recent months that the ECB, for all practical purposes, already at the “lower bound” of possible interest rates.

Most expected Draghi to focus more on fleshing out the bank’s plans for more cheap long-term loans for Eurozone banks and, possibly, a new program to push more liquidity into financial markets by buying asset-backed securities.

Draghi’s monthly press conference will begin as usual at 0930 EDT.

The euro fell by nearly a cent against the dollar to a new 14-month low of $1.3037 on the news, while the yield on German and Italian 10-year government bonds fell to 0.92% and 2.33% respectively.

The ECB’s move widens the gap between the Eurozone’s monetary policy and policy in the U.S. and U.K., both of which are moving slowly towards raising interest rates. The Bank of England left its benchmark Base Rate unchanged at 0.5% earlier Thursday, while the Swedish Riksbank also left its official rates unchanged.