"Other downside risks include higher commodity prices, weaker than expected domestic demand and export growth, and slow or insufficient implementation of structural reforms in euro area countries"
- Mario Draghi, ECB President
Financial markets were shocked on Thursday following the ECB press conference, after which the single currency plummeted to 1.329 against the greenback. While analysts were betting on no action from the ECB and expecting another bold statement, pledging to "do whatever it takes to save the Euro", Mario Draghi made an unexpected move and trim the main refinancing rate by a quarter point to a new all-time record low of 0.25%. The unpopular decision reflects an outlook of low inflation and economic weakness in the region.
In October Eurozone CPI stood at 0.7% - the lowest since January 2010, while prices in highly-indebted Greece have not risen since July. Moreover, some analysts are expressing their concerns over inflation in Spain. Following this worrying sign, Draghi added more fuel to the fire by saying the Eurozone would face a prolonged period of subdued inflation, while interest rate would remain at current level or even lower for the foreseeable future. Moreover, Draghi floated the prospect of a negative deposit rate, while officials pointed out its effect cannot be adequately predicted. The implementation of negative interest rate is likely to hurt banks' profitability by decreasing money-market rates, likely hampering credit supply to businesses and households, as well as cutting banks' incentive to lend money to the other financial institutions.
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