MercoPress. South Atlantic News Agency

Euro zone lowers rate to prop economy and avoid deflation; shares at five-year high

“ECB interest rates to remain at present or lower levels for an extended period of time” anticipated bank chief Mario Draghi

A surprise rate cut by the European Central Bank sent Euro zone shares to a five-year high on Thursday as traders bet a weaker Euro and easier lending conditions would help revive the region's economy and boost demand for stocks.

The Euro STOXX 50 index of Euro zone blue chips rose 1.3% to 3,095.51 points after the ECB decision, hitting a level not seen since September 2008 The pan-European FTSEurofirst 300, hit a fresh five-year high and was up 1.3% at 1,313.59 points.

Meanwhile, Japan's Nikkei share average fell as investors withdrew from risk-taking as they awaited US jobs data, but small cap stocks rose after the Tokyo bourse said it would include them in a new index.

Earlier in the day the ECB cut its main refinancing rate to 0.25%. It held the deposit rate it pays on bank deposits at 0.0 percent and cut its marginal lending facility - or emergency borrowing rate - to 0.75 percent from 1.00 percent.

The Euro fell sharply in response while European shares and German government bond futures rose.

The ECB 23-man Governing Council had faced intense market scrutiny in the run-up to Thursday's decision after a shock slump in Euro zone inflation to 0.7% in October - far below the ECB target of just under 2%.

Calls from government ministers and industry - the loudest from Italy - for the ECB to loosen policy to help bring down the Euro's exchange rate had also heaped pressure on the Council, though few analysts expected a move this month.

“The latest quarter-point reduction in the reference rate and the marginal lending facility rate were in line with the ECB's forward guidance, first announced in July”, said Central bank president , the central bank chief said Mario Draghi in his introductory statement during the customary post-decision press conference in Frankfurt.

”The (ECB) Governing Council reviewed the guidance today after the rate cut and confirmed that it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time” Draghi said.

Saying that the bank is ready to consider all available instruments, Draghi announced that the ECB will continue conducting the main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary.

The bank also decided to conduct the three-month longer-term refinancing operations (LTROs), to be allotted until the end of the second quarter of 2015, as fixed rate tender procedures with full allotment.

“We may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on,” Draghi said, “accordingly, our monetary policy stance will remain accommodative for as long as necessary”.

“Underlying price pressures and credit dynamics are also seen subdued, while inflation expectations continue to be firmly anchored in line with the ECB's inflation target” underlined the ECB chief.