The euro tumbled after the European Central Bank cut interest rates by 25 basis points to 1.25 percent, which caught markets by surprise as they expected rates to remain unchanged.
The European debt crisis and the Greek turmoil prompted new ECB President Mario Draghi to cut rates as Italian and Spanish bond yields are surging. Today yields on Italy’s 10-year bond hit record high of 6.3 percent.
The euro fell almost a cent to $1.3729 and the yield on Italian 10-year bonds retreated to 6.14 percent after surging to a euro-era high this week.
ECB chief Mario Draghi said that Europe is heading towards a “mild recession”.
“What we are observing now is slow growth, heading towards a mild recession by year end,” he said in answer to questions at a press conference in Frankfurt today.
“The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of the year and beyond.”
The ECB was under pressure to reverse this year’s two rate increases. With the region’s economic slowdown deepening and investors growing increasingly concerned, especially after Greece’s surprise referendum on its euro membership, the ECB had no choice but to cut rates.
“It’s a bold move by Draghi,” said Howard Archer, chief European economist at IHS Global Insight in London, who predicted a quarter-point cut. “He’s not going to be afraid of making bold moves, which is what’s needed in the current environment.”