The European Central Bank (ECB) surprised financial markets on Thursday, cutting the main refinancing rate to record lows of 0.25%.

The marginal lending rate was also cut by 25 basis points to 0.75%.

Andy Scott, associate director at foreign currency specialists HiFX, said: “The euro fell by over 1% against the US dollar and the pound Thursday following the European Central Bank’s decision to cut interest rates by a quarter of a per cent to a record low of 0.25%. Sterling traded above 1.20 against the euro for the first time since January. The decision to cut was only forecast by a few of the major banks with most waiting to see what Draghi says in the press conference still to come, looking for a signal of a December rate cut; hence the sharp fall in the euro.

“The central bank couldn’t really ignore the slump in inflation we’ve seen this year from around 2% at the beginning of this year to just 0.7% this month. When you combine that with an increase in unemployment to a record high and only a slither of growth even in the stronger eurozone countries there was clearly a case to take aim at the risk of deflation.

“When Draghi speaks at the press conference shortly we wouldn’t be surprised to hear comments aimed at providing further reassurance that the ECB stand ready to prevent further drops in the inflation rate which could weaken the euro further.”