ECB cuts key rates and is ready to bring out 'big bazooka'

In the past, Mr Draghi has resisted calls to follow the Bank of England and US Federal Reserve and embark on massive quantitative easing.

"Shock and awe tactics were expected from Draghi after months of hints, and he didn’t disappoint, throwing in everything but the kitchen sink of QE," said Nancy Curtin, chief investment officer of Close Brothers Asset Management.

"If an even more sizeable shot in the arm is required, Draghi still has the much hinted about QE remaining up his sleeve."

As well as cutting the deposit rate, the ECB cut its base interest rate has been cut from 0.25pc to a new low of 0.15pc and the emergency borrowing rate has fallen from 0.75pc to 0.4pc.

Ms Curtin said cutting the refinance rate and imposing negative deposit rates were positive steps, but added: "The real game changers are the credit easing measures which will boost liquidity in the eurozone, and reduce borrowing costs in the periphery. A European-style Funding for Lending scheme has long been called for, and its creation should help stimulate job growth."

Mr Draghi told a press conference the ECB would offer long-term loans to banks at cheap rates until 2018. The loans would be capped at 7pc of bank's lending to companies. The targeted loans would be charged a fixed rate and would not rise even if the bank raises its benchmark.

It will start to buy batches of loans to small businesses in the form of bonds, a step to funnel more credit to companies through financial markets and stop collecting weekly deposits aimed at offsetting the monetary effects of earlier bond purchases. That upshot is an additional €175bn in the financial system which could be used by banks to increase lending.

The moves, though unprecedented, were expected after eurozone inflation fell to 0.5pc in May. Low inflation puts consumers off buying goods, reducing demand in the economy. It also makes it harder for governments to repay debts and makes exports relatively more expensive if inflation is running higher in other countries.

Stock markets were largely unchanged immediately following the announcement, with the FTSE 100 up just 7 points at 6825, although Germany's DAX briefly rose above 10,000 for the first time.

The euro fell to a four-month low against the dollar. The ECB has faced called to tackle the strength of the euro which has been hurting the eurozone economy.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "While the ECB has previously seemingly baulked at taking its deposit rate into negative territory and has been concerned about possible unwanted repercussions, the ECB now clearly believes that a full lowering of the interest rate corridor (rather than just a trimming of the refinancing rate) is the most effective way of trying to soften the euro and to encourage banks to pick up their lending to the private sector."

He added: "There has to be considerable uncertainty as to how effective negative deposit rates will turn out to be."

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