Analysts hope rate cut will have far-reaching impact

Following weeks of speculation, the European Central Bank has announced an interest rate drop of 0.25 per cent, bringing the euro area core benchmark interest rate to a historic low of 0.5 per cent.

The interest rate cut - the first in 10 months - will have an immediate impact on those with tracker mortgages, but analysts are hoping that its impact will be more far-reaching, providing a much-needed boost to the struggling euro zone economy. A swathe of data published this week bolstered the case for monetary intervention. Unemployment rose again in April, with more than one in four under-25 year olds out of work in the euro zone. Business sentiment and inflation also fell last month.

The drop in the annual rate of inflation in April to 1.2 per cent - well below the 2 per cent ceiling set by the ECB - effectively removed one of the main barriers to intervention. ECB president Mario Draghi has repeatedly stressed the bank's responsibility to maintain price stability and keep inflation below, but close to, 2 per cent. The fall in inflation to 1.2 per cent, however temporary, well below the 2 per cent mark, paved the way for the ECB to act without jeopardising price stability.

The cut in interest rates to 0.5 per cent means that interest rates are now at a historic low. The euro area interest rate reached an all time-high of 4.75 per cent in 2000, and touched a record low of 0.75 per cent in July last year, following months of incremental rate decreases.

What impact this interest rate cut will have on the real economy is the central question. The ECB has previously pointed out that the bank's interest rate policies are not transmitting to the real economy, particularly in the so-called "peripheral" countries, though the move will be welcomed by holders of tracker mortgages.

Further details of the decision will emerge in this afternoon's press conference, where some analysts are hoping that Mario Draghi announces other, more targeted measures, particularly to address the issue of SME finance.