ECB slashes interest rate to 0.15%

The European Central Bank (ECB) today slashed its interest rates to a record low and cut one of its benchmark rates below zero in a radical move that policy makers hope will help the currency bloc to stave off the threat of deflation.

The ECB cut its main refinancing rate to 0.15 per cent, from 0.25 per cent, and its deposit rate from zero to minus 0.10 per cent, becoming the first major central bank to venture into negative territory.

The idea is to incentivise the banks to lend to businesses, thereby stimulating growth.

The ECB is the first of the "Big Four" central banks (the ECB, the US Federal Reserve, the Bank of Japan and the Bank of England) to do this.

Borrowing costs across the countries worst affected by the eurozone’s debt crisis fell only slightly following the ECB’s decision to cut rates. The yield on Spain’s benchmark 10 year bonds, which rose above 6.8 per cent in the heat of the eurozone debt crisis, slipped from 2.87 on Wednesday evening to 2.86 per cent immediately after the rate cut.

Although the danger of deflation in the eurzone is limited, the ECB is concerned that growth is very sluggish and bank lending weak - both of which could potentially derail the fragile economic recovery.

The eurozone economy is only growing at 0.2%. Consumer spending, investment and exports are all growing at a slower pace than this time last year.

Inflation in the Eurozone fell to 0.5% in May, down from 0.7% in April. This is well below the European Central Bank's 2% target.

If the eurozone slips into deflation, consumers would spend even less because they'd expect prices to fall in future months. For the same reason investors stop investing.

Growth would then grind to a halt and demand would be severely constrained. The large debts amassed by the eurozone's countries, companies and banks would take longer and be harder to pay off.

Unemployment, which is already at nearly 12% in the eurozone, and much higher in places like Spain, Portugal and Greece, would get even worse.

It's a picture that prompted today's moves by Mario Draghi and the 23 other members of the governing council at the European Central Bank.