The European Central Bank (ECB) cut its main interest rate on Thursday to a new record low of 0.25 per cent, responding to a surprise drop in inflation by easing policy to support the euro zone's weak economic recovery.
The quarter-point cut was largely unexpected and highlights the ECB's concern about the slowdown in euro zone inflation to 0.7 per cent in October-a rate far below its target of just under 2 per cent.
The euro fell sharply after the decision to $1.3397 from $1.35 prior to the announcement.
The ECB held the deposit rate it pays on bank deposits at 0.0 percent, but cut its marginal lending facility - or emergency borrowing rate - to 0.75 per cent from 1.00 per cent.
The central bank had faced calls from Italy's finance minister and France's industry minister to ease policy in response to strength in the euro.
The European Central Bank chose to cut interest rates on Thursday because inflation is expected to be low for a prolonged period of time, said ECB President Mario Draghi on Thursday.
"We may experience a prolonged period of low inflation to be followed by gradual upward movement towards an inflation rate of below but close to 2 per cent later on.
"Accordingly our monetary policy stance will remain accommodative for as long as necessary," he told a news conference after the bank cut its main refinancing rate by 25 basis points to 0.25 percent.