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European Central Bank enters uncharted territory with rate cuts

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The European Central Bank cut its key lending rate and deposit rate on Thursday in an effort to boost bank lending and combat low inflation rates which remain at 0.5%, well below the bank’s target of 2% inflation.

The ECB cut the main lending rate to a new low of 0.15% from 0.25% and dropped the deposit rate to -0.1%, a first for a bank of its size. That means the ECB is charging commercial banks for overnight deposits at the central bank.

ECB President Mario Draghi pledged that interest rates will remain low and vowed to take further action should the measures announced Thursday prove insufficient in stimulating new lending. Draghi acknowledged that rate cuts have “reached the lower bounds.”

Further steps could include a program similar to the U.S. Federal Reserve’s quantitative easing, where the central bank would undertake a broad-based asset purchase program. The ECB’s economists issued new forecasts for inflation below previous estimates. The ECB now sees inflation running at an annual rate of 0.7% this year, versus previous forecasts of 1% earlier this year. U.S. stocks moved to fresh record highs after the news.

The ECB decision comes just one day ahead of the May jobs report for the U.S., which will be closely watched Friday morning.

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