The European Central Bank sprung a surprise on Thursday by cutting the key interest rate to a record low in November, yielding to intense market speculation for such a move, given the combination of low inflation, record unemployment and a stronger currency.
The Governing Council, led by ECB President Mario Draghi, cut the main refinancing rate by 25 basis points to record low 0.25 percent, following the rate-setting session in Frankfurt. Previously, the bank slashed the rate by a quarter-point in May, which was the first reduction in nine months.
The bank also cut the marginal lending facility rate by a quarter-point to 0.75 percent. The previous change was a 50 basis points cut in May. The zero deposit rate was left unchanged.
Economists had expected the ECB to leave rates unchanged in November, with some calling it 'premature', though there was intense speculation for a rate cut.
"The ECB just surprised most analysts, including us," ING Bank Senior Economist Carsten Brzeski said. "Deflationary risks and the stronger euro seem to have motivated the ECB's move."
"It is obvious that the ECB under president Draghi has become much more pro-active than under any of his predecessors," the economist added.
Draghi is set to hold the post meeting press conference at 8.30 am ET, where he will discuss the latest interest rate reduction. Some economists expect the central bank to announce more long-term refinancing operations or LTROs then.
In an immediate response to the interest rate cut, the euro weakened below 1.35 against the dollar and the European stock markets rallied.
"The cut... clearly not going to transform the outlook for the economy on its own, particularly as the Council shied away from imposing a negative deposit rate in attempt to stimulate bank lending," Capital Economics economist Jonathan Loynes said.
"With the ECB now surely out of interest rate ammo and still reluctant to engage in quantitative easing, even the currency effect might not last very long."
Fears of deflation arose after euro area inflation unexpectedly fell in October to a four-year low of 0.7 percent, which is well below the ECB's target of 'below, but close to 2 percent'. The rate has held below the target for nine successive months.
Core inflation, which excludes cost of energy, food, alcohol and tobacco, also eased to 0.8 percent in October.
Meanwhile, the unemployment rate held steady at a record-high 12.2 percent in September.
On the other hand, hard data suggest that the euro area economy continued its expansion in the third quarter. Investor confidence rose to a two-and-a-half year high in
November, the latest survey from the think tank Sentix showed this week.
The latest ECB Bank Lending survey showed that euro area banks expect to ease credit standards on loans to enterprises, which was the first such expectation since the fourth quarter of 2009. However, the central bank's money market survey showed that liquidity conditions remain tight.
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June 19, 2026 16:46 ET Major central banks continued to dominate the economic news flow this week too, led by the Federal Reserve, as they announced their latest policy decisions. The Federal Reserve policy session was in focus as it was the first to be led by the new chief Kevin Warsh. In Europe, central banks of the U.K. and Switzerland announced their rate decisions. In Asia, the Bank of Japan drew attention for its policy moves, while data out of China threw some light on the state of the economy.