The European Central Bank (ECB) has cut interest rates by a quarter of a percentage point to 0.75 per cent, a new record low.

The rate cut, announced at 12.45pm, is expected to provide a shot in the arm for the European economy. It will reduce repayments for thousands of Irish people with tracker mortgages, which are tied to the central bank’s rates.

For every quarter of a point the ECB lowers rates, the monthly cost of servicing a €100,000 tracker mortgage declines by about €15. This means that the average tracker mortgage holder with an outstanding loan of €300,000 will see monthly savings of €45 from the beginning of August.

As a result of the move – the third such rate reduction in nine months – a person with a €300,000 tracker mortgage will now pay about €135 a month less than they were paying this time last year which will amount to a total annual saving of more than €1,600.

While the cut will be automatically be passed on to tracker mortgage holders, those with Standard Variable Rate (SVR) mortgages will have to wait for their individual banks to follow suit although such a move is not guaranteed.

Ulster Bank is the only financial institution to say it will pass on the cut to homeowners on variable mortgages.

The Irish Small and Medium Enterprises Association (ISME) called on the Government to take “the strongest action possible, including sanctions, on banks that refuse to pass on the reduction to their small business customers and consumers”.

Its chief executive Mark Fielding said the rate cut will be “seen as an opportunity by the greedy bailed-out bankers to maintain the benefit at the expense of their customers. The banks should be forced through stiff sanctions, including penalties, to do the right thing and pass the rate cut on to their hard pressed customers”.

“We would call on all banks to pass the full rate cut on immediately to those on standard variable rate mortgages,” said Ciaran Phelan, CEO of the Irish Brokers Association.

“They have been poor in passing ECB cuts on in the past but we hope that they may finally be arriving at the realisation that struggling mortgage holders need all the assistance they can get and that any move which will make monthly repayments more affordable will benefit both banks and consumers alike."

The ECB also cut the interest rate on its deposit facility to 0 per cent in a move aimed at encouraging banks to lend their funds in the market to other banks overnight, where they receive a higher interest rate, currently about 0.3 per cent.

"The benchmark rate doesn't really matter at the moment, but cutting the deposit rate all the way to zero takes the ECB into new territory," said James Nixon, chief European economist at Société Génerale in London. "If you can kick-start the money market you go a long way to addressing some of the funding problems that banks face. That may free banks to lend to the economy."

Calls for an interest rate reduction have been rising in recent months as the euro zone economy has weakened.

Although financial markets have been considerably calmer since EU political leaders last Friday agreed a series of measures to address the sovereign debt crisis, the real economy continues to flag.

Speaking in a press conference today, ECB president Mario Draghi said the euro zone economy was facing risks, but inflation did not pose a problem.

"Inflation rate pressure...has been dampened. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment," he said.

He said the euro zone economy would recover only gradually, threatened by the debt problems of several of the region's members and banks' unwillingness to lend.

"The risks surrounding the economic outlook for the euro area continue to be on the downside," Mr Draghi said. "Beyond the short term, we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions."

The ECB's loosening of policy followed shortly after China and Britain did similar. Mr Draghi said there was no coordination between the three.

Additional reporting - Reuters