European Central Bank cuts benchmark rate to 0.25%

The European Central Bank (ECB) has cut its benchmark interest rate to new record low of 0.25%, down from 0.5%.

The move has come as a surprise to many analysts and as a result, the euro fell sharply while European shares and German government bond futures rose.

Recent concerns over low inflation and the weakness of the eurozone economy had led many to suggest that further action from the ECB may be needed, but not until later in the year.

Inflation in the eurozone fell to 0.7% in October - its lowest level since January 2010.

Prices in Greece - one of the eurozone members worst hit by the economic crisis - have not risen since July. Some economists are also worried about deflation in Spain.

The ECB's target is to keep inflation at 2% - seen as a healthy level for economic growth. The 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 percent in October - far below the ECB target of just under 2 percent.

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 ECB cut its main refinancing rate to 0.25 percent. 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.

"Deflationary risks and the stronger euro seem to have motivated the ECB's move," Carsten Brzeski, an analyst at ING said.

"It is obvious that the ECB under president Draghi has become much more pro-active than under any of his predecessors."

Previously, Mario Draghi had pledged to keep rates low for the foreseeable future as part of the bank's new policy of offering forward guidance alongside its decisions.

Rates had been held at 0.5% since May, and at 0.75% since July 2012.

The cut in the benchmark rate is designed to make it cheaper for banks to borrow from the ECB, with the aim that this will be passed on to businesses taking out loans, boosting the economy.

The euro fell sharply against the dollar in response to the decision, and was down more than 1% half an hour later.

A weaker euro may be a help to the eurozone economy by making European goods cheaper abroad, benefiting exporters.