The European Central Bank finally slashed interest rates by a hefty half a percentage point this week in a bid to shore up the waning confidence of euro zone consumers and businesses.
The long-awaited cut was greeted with a sigh of relief, particularly in Germany, the euro zone's biggest and most sluggish economy which is teetering on the brink of another recession.
The cut brings the ECB's benchmark refinancing rate to 2.75 per cent - the lowest level in over three years - after it has been held steady for more than a year.
ECB President Wim Duisenberg justfied the cut, for which Germany and other euro zone members have been clamouring for months, by saying there was more evidence that the sputtering economy was helping tame inflation.
"Since our last meeting, the arguments in favour of a cut have strengthened," he told a news conference after the last policy meeting of the bank's governing council this year.
"The evidence that inflation pressures are easing owing in part to sluggish economic expansion has increased."
The ECB's main task is to keep inflation in check but has been faced with inflation above its two percent ceiling most of the year, making it difficult to trim rates to spur growth.
But Duisenberg pointed to fears of war in the Middle East, high level of uncertainly and still weak financial markets as factors making the growth outlook less upbeat than before. A stronger euro, moderating wage demands and poor consumer demand meant inflationary pressures were less acute.
"Our decision should also help to improve the outlook for the euro area economy by providing a counterweight to some of the existing downside risks to economic growth, thereby supporting confidence," Duisenberg said.
Visibly happy with the governing council's decision, Duisenberg signalled, however, that the bank had now done its bit to support growth.
He made clear that the ball was now in the governments' court to pull the region out of doldrums by delivering on promises to make Europe more competitive through labour market reforms and cutting red tape.
"I should like to stress again that there is still an urgent need to implement decisively a structural reform agenda," he said.
The ECB argues that over regulation, inflexible labour markets and remaining obstacles to free competition make euro zone inflation sticky and prevent the region from growing faster.
The ECB's decision was broadly welcomed by the financial markets as a sign the ECB finally acknowledged that the euro zone economy was in deep trouble and that it had a key role to play in bolstering much needed confidence.
"It shows the ECB is concerned about euro zone growth, and that's a positive thing," said Don Smith, a bond analyst at ICAP in London.
European shares jumped right after the decision was announced but retreated to previous levels as most traders had priced in a decisive action by the central bank.
The euro see-sawed in the first minutes but then rallied as investors cheered better economic prospects for the euro zone. The single currency rose as far as $1.0024, half a cent above the day's lows of $0.9979.
Outside the euro zone, the Bank of England and the Swiss national bank decided to keep their rates unchanged, while the Danish and Swedish central banks cut them by 50 and 25 basis points respectively.
Most analysts said chances of another ECB cut in the next few months were remote, but that Duisenberg left the door ajar for further easing in case the economy turned further down.
"The written statement suggests that for some time to come we shouldn't expect another move," said Adolf Rosenstock at Nomura International in Frankfurt. "Nevertheless in the Q&A session he eased up a little bit on that."
Critics had been accusing the fiercely independent ECB of pursuing an unrealistic inflation target of two per cent, while turning a blind eye to the euro zone's weak growth for too long this year.
Pressure for a rate cut has also been growing on the ECB's governing council, culminating in a heated debate between hawks and doves at the previous policy meeting in November, which kept rates steady.
Since then, however, ECB officials had gradually shifted towards an easing mode, stressing that the inflation outlook for the euro zone had improved while risks to economic growth increased.
Worries that the global economy was not out of the woods yet were reinforced on Thursday by one of the world's biggest multi-national corporations, engineering giant Siemens, which said it expected a tough year ahead.
"We do not expect significant improvement in overall economic conditions," Chief Executive Heinrich von Pierer said.
The cut comes after months of pleading for cheaper money from several euro zone governments, particularly its biggest member Germany, struggling to revive a stagnating economy without abandoning fiscal prudence.
German Chancellor Gerhard Schroeder, industry leaders and trade unions all expressed their relief the ECB finally decided to act.
Economists say Germany, once the continent's growth engine, needed a deeper monetary easing, given that its inflation rate is just around one percent, unemployment is high and rising while business and consumer confidence is stuck in the doldrums.
It is also one of the prime candidates for a major overhaul, but Schroeder's newly re-elected Red-Green government has been shying away from radical reforms fearing trade union backlash.
Germany's woes mean the euro zone as a whole grew only 0.3 per cent in the third quarter and faces a risk of stagnation or contraction in the first quarter of next year. (Reuters)
But the inflation and growth picture across the 12-member euro zone varies greatly, illustrating the difficulty the ECB faces trying to form a one-fit-all monetary policy.
Spain, the euro zone's number four economy after Germany, France and Italy, is still growing at close to two percent year-on-year and its inflation rate in October stood at double the ECB's two percent ceiling.
To underline this point, Spanish Economy Minister Rodrigo Rato warned the ECB on Wednesday that a rate cut would be harmful to his country's inflation outlook.