The European Central Bank (ECB) on Thursday renewed its efforts to fight against economic downturns, with combined measures including cutting its key interest rate to a new low and buying up bonds, surprising most market players.

Rate cut

The ECB cut its key interest rate by 25 basis points to a record-low 1 percent on Thursday.

ECB President Jean-Claude Trichet told reporters after the ratecut this was not necessarily the lowest point of the cycle, which has slashed the main refinancing rate by 325 basis points since October.

The ECB said the rate cut is due to the fact that the inflation threat to the eurozone continue easing, while the recession deepens.

According to the International Monetary Fund, the 16-nation economy will shrink 4.2 percent this year, more than the projected2.8 percent contraction in the United States and 4.1 percent in the United Kingdom.

Inflation was 0.6 percent in April. The ECB, which aims to keep the rate just below 2 percent, said the figure may drop below zero in 2009.

Buying up bonds

Trichet announced the ECB plans to spend about 60 billion euros(US$80 billion) buying covered bonds, taking markets by surprise after Bundesbank chief Axel Weber had campaigned against such a policy, though some smaller nations pushed it.

It marks the first step of the central bank of Europe on a path of quantitative easing, following the U.S. Federal Reserve, the Bank of England and the Japanese central bank.

Unlike its counterparts in the US, Britain and Japan, the ECB chose not to buy national bonds, because it was banned by EU laws from buying bonds of EU member countries.

Moreover, a consensus was hard to be achieved on the purchase proportion of the national bonds among the 16 EU members, the main players of the euro zone.

The ECB has "decided in principle to buy euro-denominated covered bonds issued by member countries of the euro zone," said Trichet, adding that "more details will be announced after the next June 4 meeting of the governing council."

The covered bonds, securities issued by banks and backed by mortgages or other loans, are regarded as the safest corporation bonds after the national debt, with its interest rate slightly higher than the national bonds.

Analysts said, with the euro zone banks accounting for nearly three quarters of business financing, expanding money supply to the banks through buying up bonds and providing longer term loans will help to further relax money market conditions with major relief to the banking system.