The European Central Bank cut its main interest rate by 25 basis points to 1.25 percent on Thursday as the euro zone's worsening debt crisis outweighed concern over persistently high inflation.

ECB President Mario Draghi will explain the Governing Council's decision at a 1330 GMT news conference -- his first at a monetary policy meeting after taking over the reins on Tuesday from Jean-Claude Trichet.

The ECB also cut the interest rate on its deposit facility to 0.5 percent and the rate on the marginal lending facility to 2.0 percent.



There's no doubt it's good for all of the heavily indebted economies such as Spain. Now we just need it to be transferred to the Euribor review.

The markets right now needed help from every side.


This is a response to the weakening European economy. There is not a situation to further roil the market given the situation in Greece. They are in a situation that makes conforming to a pure inflation target a charade.


Although the cut is fully justified by the current market and economic conditions, the move is a real surprise, given that the September press conference didn't prepare the ground for an imminent rate cut.

The recent development in Greece, uncertainties about the EU package implementation and risks of spill-over effects to other EMU countries (i.e. Italy) have probably convinced the new ECB president Draghi (and the rest of the GC) that it was now time for the ECB to come in and try to rescue the EMU economy.

We expected stable rates today and a 50bp cut in December. The rates corridor has not been changed today. However, we expect Draghi to signal today that the ECB will continue to buy bonds via the SMP in the coming weeks.

Given the ongoing developments for EMU periphery spreads, Draghi might even suggest that ECB will be even more aggressive with its SMP bond purchases but we strongly believe that Draghi will make crystal clear that the move is just temporary and strictly conditional to a rapid implementation of the EFSF changes.


- The majority of 70 economists polled by Reuters a week ago had expected the ECB to hold its key interest rate at 1.5 percent at Thursday's meeting while preparing the ground for a 25-basis points cut in December.

- The cut marks a change in policy course after the ECB increased its rates in July and April, when it became the first major central bank to hike after the intensification of the financial crisis.

- Markets will now look for hints on whether the ECB is preparing to cut rates again next month.

- Attention will also focus on other changes in the central bank's policy after the change of guard, especially whether its government bond programme will be boosted.

(Reporting by Reuters bureaus)