The decision to lower borrowing costs in the 17-member eurozone came as a surprise on the first day of the G20 summit in Cannes, France, where world leaders are discussing how to contain Europe’s sovereign debt problems.
The financial markets had expected the ECB to leave rates unchanged, but Europe’s central bankers clearly felt the Greek government’s decision this week to call a referendum on an EU bailout package for the country had pushed the eurozone to the brink of economic disaster.
The cut comes just after Italy’s Mario Draghi officially took over the helm of the ECB on Tuesday. He will have to justify the decision to pursue expansionary monetary policy at a time when inflation in the eurozone is clocking three percent – considerably over the ECB’s two-percent target.
At his first press conference after chairing a meeting of the ECB’s executive council, Draghi said the current economic outlook for the 17 countries that share the euro “is subject to particularly high uncertainty and intensified downside risks.”
Germany’s DAX stock index surged by three percent immediately after the ECB’s decision was announced.
“The surprise interest rate cut shows just how seriously the ECB is taking the possibility that the economy could worsen next year,” said Commerzbank chief economist Jörg Krämer.