ECB cuts key lending rate to 1.25 percent

The ECB has cut its key interest rate by 0.25 percentage points to 1.25 percent, just one month after its last reduction.

Analysts say the ECB's effort to haul the 16-nation euro zone out of its first recession could drag the ECB further into murky waters called "quantitative easing", essentially the creation of money to boost economic activity.

Focus on the euro zone

The US Federal Reserve, Bank of England and Bank of Japan have chosen this path by unveiling plans to buy government and corporate debt and high-risk, mortgage-backed securities.

The ECB, however, has focused on the euro-zone banking sector, which controls business financing on a much greater scale than elsewhere.

The central bank's first move is likely to be a doubling of the maturity of refinancing operations, which provide funds to commercial banks at fixed rates, from six to 12 months.

Debate over quantitative easing

ECB President Jean-Claude Trichet maintains this is an example of "credit easing" as opposed to quantitative easing, which is a highly controversial strategy.

The bank cut its deposit rate and the marginal lending rate, to 0.25 percent and 2.25 percent respectively.

The deposit rate is amount of interest the pays to commercial banks that leave money with it overnight.

That figure has increasingly become the gauge for rates banks charge each other for overnight loans and thus a marker for wider lending to businesses and households.