Draghi cuts ECB rate to fight ‘prolonged’ inflation weakness

European Central Bank President Mario Draghi warned the euro area risks a “prolonged period” of low inflation as the bank cut its benchmark interest rate to a record.

Pledging to keep borrowing costs low for an “extended period,” Draghi said weakening price pressures justified the ECB’s surprise decision to cut its main refinancing rate today by a quarter point to 0.25 percent. Just three of 70 economists surveyed by Bloomberg News anticipated the action even after inflation faded to its slowest in four years.

“Our monetary policy stance will remain accommodative for as long as necessary,” Draghi told reporters in Frankfurt. Officials will provide more detail on the ECB’s longer-term rate plans at next month’s meeting, he said.

The ECB now has just one more quarter-point cut left before its main rate reaches zero, increasing the likelihood of unconventional tools such as a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB’s ceiling and unemployment is at the highest level since the currency bloc was formed in 1999.

The ECB kept its deposit rate at zero and trimmed the marginal lending rate to 0.75 percent, allowing Draghi to say the ECB still had conventional policies to deploy if needed. The bank also will extend its unlimited offerings of one-month and three-month cash until the middle of 2015, he said.

Money Markets

“We continue to monitor closely money market conditions and their potential impact on our monetary policy stance,” Draghi said. “We are ready to consider all available instruments.”

The euro fell the most in almost two years versus the dollar, touching $1.3296, the lowest since Sept. 16. Euro-area government bonds rose, led by Italian and Spanish securities, with Germany’s two-year rate dropping to the least since July.

The ECB is among the central banks using so-called forward guidance in an effort to avoid market rates from rising too soon and to encourage consumers and companies to spend. On how long the ECB will pledge to keep rates low, Draghi said today that officials will be “clearer on the length of time of this period in December, but presumably it’s not going to be a short time.”

Draghi’s ECB sprang into action as the euro region’s economy shows signs of fragility. Unemployment is at 12.2 percent and the euro has climbed almost 5 percent against its major peers this year in a challenge to exporters.

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