European Central Bank introduces negative interest rate to bust deflation

The European Central Bank has taken the radical action of introducing negative deposit rates in a desperate attempt to kickstart struggling eurozone economies.

The ECB's deposit rate was cut from 0pc to -0.1pc, meaning banks will have to pay to store money there, rather than lending it out. The largely symbolic gesture is ECB President Mario Draghi's latest attempt to boost inflation, which has fallen to worryingly low levels in the bloc.

Meanwhile, its base interest rate has been cut from 0.25pc - already a radically-low level - to 0.15pc and the emergency borrowing rate has fallen from 0.75pc to 0.4pc.

The ECB added that more developments would be announced at a press conference at 1.30pm GMT.

The moves, though unprecedented, were expected after eurozone inflation fell to 0.5pc in May. Low inflation puts consumers off buying goods, reducing demand in the economy. It also makes it harder for governments to repay debts.

It also makes eurozone exports relatively more expensive if inflation is running higher in other countries. Markets were largely unchanged immediately following the announcement, although the euro fell to a four-month low after the news.

"While the ECB has previously seemingly baulked at taking its deposit rate into negative territory and has been concerned about possible unwanted repercussions, the ECB now clearly believes that a full lowering of the interest rate corridor (rather than just a trimming of the refinancing rate) is the most effective way of trying to soften the euro and to encourage banks to pick up their lending to the private sector," said Howard Archer, chief UK and European economist at IHS Global Insight.

"There has to be considerable uncertainty as to how effective negative deposit rates will turn out to be."

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