ECB Cuts Interest Rates to Record Low

The move comes on the heels of dismal economic indicators for the 17-country euro zone. In recent months, inflation has plunged, economic confidence has worsened and unemployment has risen to a record 12 percent across the single currency zone. Even the German economy showed signs of weakening, with two powerhouse corporations, BMW and Siemens, announcing a drop in profits for 2013.

Above all, the debt-plagued Southern European countries are not doing as well as hoped, with the economies of Greece, Italy, Portugal and Spain buckling under harsh reforms and soaring unemployment.

The move will make borrowing from the ECB more affordable for commercial banks in the euro zone than ever before since the introduction of the common currency in 1999. The hope is that the banks will then pass on these savings in the form of loans to businesses and other customers. Whether this will actually happen remains unclear, however. The ECB cannot dictate the behavior of financial institutions, which have become increasingly wary in the face of the euro crisis.

Predicted by the Experts

Many economists predicted the rate cut, the first since July 2012, just before Draghi calmed markets by promising to do "whatever it takes" to rescue the euro. However, some economists, including ECB Executive Board member Jörg Asmussen, are doubtful that cutting rates can help the flagging economy.

Last year, the euro zone's gross domestic product (GDP) fell by 0.6 percent, and the European Commission expects it to shrink again by some 0.3 percent. Germany should still grow -- albeit at a slightly decelerated rate of 0.5 percent, according to the German government. The country's economic performance is then expected to pick up again significantly in 2014 with a growth rate of 1.6 percent.

Before the decision was announced, there had been discussion in Germany about a possible interest rate cut, with savings banks, cooperative banks and the insurance industry in Germany voicing their objection. The DAX, Germany's blue-chip stock index, showed little reaction to the ECB decision, reaching an interday high of 7,965 points shortly after the announcement, then began dropping off slightly. According to one trader, speculation over the decision in recent weeks meant that the cut had already been largely priced in.