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ECB cuts rates to ward off euro zone deflation threat

[September 04, 2014]  FRANKFURT (Reuters) - The European Central Bank cut interest rates to new record lows on Thursday, unexpectedly lowering borrowing costs to try to lift inflation from rock-bottom levels and support the stagnating euro zone economy.

The ECB cut its main refinancing rate to 0.05 percent from 0.15 percent. ECB President Mario Draghi had said after the ECB's last rate cut in June that "for all the practical purposes, we have reached the lower bound".

In a landmark speech on Aug. 22, however, Draghi said indications from financial markets showed inflation expectations "exhibited significant declines at all horizons" in August.

Euro zone inflation slowed to 0.3 percent last month, sinking deeper below the ECB's target of just under 2 percent and raising the specter of deflation in the euro zone.

On Thursday, the ECB also said it had lowered the rate on bank overnight deposits to -0.20 percent, which means banks pay to park funds at the central bank, and cut its marginal lending facility - or emergency borrowing rate - to 0.30 percent.

Markets now turn their attention to ECB President Mario Draghi's 1230 GMT (0930 EDT) news conference, at which he is expected to give a more detailed explanation of the ECB's decision.

(Writing by Paul Carrel; Editing by Catherine Evans)

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