European Central Bank holds main interest rate at record low, cuts inflation forecast

As expected, the European Central Bank held its refinancing rate — which determines what banks pay to borrow from the ECB — at a record low of 0.25 percent on Thursday after last month’s surprise cut.

The decision came after inflation rose to 0.9 percent in November from 0.7 percent the previous month, suggesting the threat of deflation has diminished.

The ECB, however, cut its inflation forecast for next year to 1.1 percent from 1.3 percent, well below its target of 2 percent. This worrisome sign of weakness highlights the challenge for policymakers to get the flood of cheap money out of banks and into the broader economy.

The inflation rate is expected to reach 1.3 percent in 2015. 

The central bank also increased its economic growth forecast for next year to 1.1 percent from 1.0 percent previously, but maintained its prediction for a contraction of 0.4 percent this year.

ECB President Mario Draghi told reporters after the meeting in Frankfurt that the central bank was “ready and able” to take further measures beyond lower interest rates to bolster the faltering euro zone economy, which grew by 0.1 percent in the July-September quarter, compared with 0.3 percent in the previous quarter.

The bank has looked at "a full array of instruments" and “we are ready and able to act,” Draghi told a news conference. 

“Our level of preparedness is pretty high on all of them," he said, while leaving open what the ECB might do.

"We have not identified any specific instrument in today's discussion."

The refinancing rate influences the cost of borrowing for businesses and consumers. A lower rate should, in theory at least, lead to lower market rates and make it easier for the private sector to borrow, leading to greater investment, employment and economic growth.

But banks have shown a reluctance to lend at such low rates.

Draghi said there was a “brief discussion” about a negative deposit rate at Thursday’s meeting — currently at zero — which would effectively charge banks to keep their money with the ECB overnight. 

This would encourage banks to pull their money out of the facility and lend it. It's not clear how far the discussion went, but such a move has been widely speculated in the market. 

Draghi also indicated there had been talk about emulating a program used by the Bank of England that offers very cheap cash to banks if they promise to lend it.