ECB surprises with lower than forecast rate cut

The European Central Bank (ECB) pruned its benchmark interest rates by a quarter percentage point to a new record low, but the decision left the markets stunned as most economists were looking for a wider cut. The ECB cut its key lending rate to 1.25% from 1.5% while the rate for overnight deposits at the central bank was also trimmed to 0.25% from 0.5%. The decision stunned economists, who had expected a reduction of 50 basis points. At 1.25% the main lending rate is the lowest since the ECB took charge of monetary policy in 1999. The euro shot higher on the decision, rising as high as US$1.3415. It most recently was up 1% at US$1.3361. Stocks in Europe were off session highs but still sporting impressive gains. The pan-European Dow Jones Stoxx 600 climbed 3.1% shortly after the ECB decision. The Frankfurt-based ECB, which sets interest rates in the 16 countries that use the euro as their common currency, arrived at the decision after considering economic data showing rising unemployment, slumping industrial output and dwindling consumer spending. ECB president Jean-Claude Trichet will hold a press conference later in the day to explain today’s decision as well as to discuss whether the central bank will announce other measures to stimulate the euro-zone economy, like buying short-term corporate debt.