ECB surprises markets with rate cut

The Euro logo is pictured outside European Central Bank ahead of the the meeting of the Governing Council in Frankfurt am Main, central Germany, on August 1, 2013. Mario Draghi, President of the European Central Bank, ECB repeated a pledge that eurozone interest rates would remain low or could even fall further amid risks for the euro area. AFP PHOTO / DPA / BORIS ROESSLER GERMANY OUT (Photo credit should read BORIS ROESSLER/AFP/Getty Images) BORIS ROESSLER

FRANKFURT, Germany The European Central Bank has startled investors with a surprise cut in its benchmark interest rate aimed at boosting a hesitant recovery in the 17 countries that use the euro.

The bank lowered the benchmark refinancing rate to a record low 0.25 percent from 0.5 percent at a meeting of its 23-member governing council in Frankfurt.

Recent economic data such as lower-than-expected inflation of 0.7 percent for the 17-nation eurozone have suggested that Europe's economic recovery remains weak. But most economists thought the bank would wait to offer more economic stimulus at least until December when it will have new forecasts from its own staff.

The surprise move underlined the bank's flexibility under President Mario Draghi, who took office in 2011. A lower refinancing rate makes it cheaper for banks to borrow from the ECB, in hopes that that lower rate will be reflected in what companies pay for credit. That would make it easier for them to expand and create new jobs and growth.

Still, many economists have said a rate cut from the current low level would have mostly symbolic impact. The problem is that banks in several countries are unable to pass on the lower rate because their own finances are strained.

The announcement sent the euro down against the dollar. That's something the ECB won't mind, as the stronger euro can hold back eurozone exports.

The 17 European Union member countries that use the shared euro currency returned to growth in the second quarter, with a modest 0.3 percent increase in output.

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