The European Central Bank (ECB) cut rates from 0.25 per cent to 0.15 per cent after inflation in the 18-nation bloc fell to 0.5 per cent while growth in the first quarter was confirmed at a lacklustre 0.2 per cent and survey data indicated further slowing.
The ECB also cut the overnight deposit rate for lenders that hold money with it from zero to -0.1 per cent – effectively penalising them for hoarding cash and pushing them to lend.
In London, the Bank of England left interest rates on hold at 0.5 per cent despite rumblings that some members of the Monetary Policy Committee were edging closer to voting for a hike.
The cut in Frankfurt was widely expected, and Howard Archer, chief UK and European economist at IHS Global Insight, said it was “thoroughly justified by the mounting risk of persistent very low eurozone inflation morphing into deflation”.
He added: “Despite being widely anticipated and in some quarters criticised for occurring too late, it is still a bold and unusual move by the ECB to take its deposit rate into negative territory. “
But Schroders European economist Azad Zangana argued against the deposit rate cut, saying: “We expect banks to simply pass on the costs to households and businesses, either by charging fees for savers, but more likely through higher interest rates on new borrowers – the opposite of what the ECB is trying to achieve.”
Carsten Brzeski, of ING Bank, admitted the ECB had “entered unchartered new territory in its quest to support the eurozone economy”.
Policymakers fear the possibility of the eurozone plunging into a spiral of falling prices, with an unexpectedly sharp drop in inflation to 0.5 per cent in May adding to the threat. Low inflation makes it difficult for individuals and governments who have borrowed money to reduce debts, while deflation can stifle growth as consumers delay spending.
Meanwhile, eurozone unemployment remains stubbornly high at 11.7 per cent.