ECB Cuts Main Rate on Low Inflation Figures

The European Central Bank (ECB) made a surprise cut to its benchmark interest rate today, reducing the 0.5% main rate, which was already at a record low, by another 25 basis points to 0.25%.

The move arrives on the heels of diminishing inflation in the euro zone. In October, inflation fell to an annual rate of 0.7%, whereas the ECB has aimed to keep inflation at 2%. While lower inflation might not sound like such a bad thing, especially for cash-poor consumers, October's decline could suggest a greater risk of deflation, which can eat into business profits and contribute to higher unemployment.

Joblessness continues to be one of Europe's most nagging economic problems. "Real incomes have benefited recently from generally lower energy price inflation," said ECB President Mario Draghi. "This being said, unemployment in the euro area remains high, and the necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity."

In announcing the decision, Draghi noted that the rate cut aligned with the Bank's prior guidance regarding inflation, but warned that low inflation could be a lasting issue. "We may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on," he said. "Accordingly, our monetary policy stance will remain accommodative for as long as necessary. It will thereby also continue to assist the gradual economic recovery as reflected in confidence indicators up to October."

Indeed, some of the latest news from the euro zone has given some analysts reason for optimism, particularly Germany's manufacturing numbers and Spain's outlook upgrade. Still, the ECB's sudden decision to cut its rates in reaction to Europe's most recent inflation figures could end up undermining some of the confidence on which Draghi and his colleagues are eager to build.

Stay tuned to NACM's blog and eNews for further updates and analysis on this story.

- Jacob Barron, CICP, NACM staff writer

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