The European Central Bank’s main interest rate has been cut from 0.05% to 0% as part of a package of measures intended to revive the eurozone economy.
The ECB will also expand its quantitative easing program from €60 billion to €80 billion a month.
The bank also decided to further cut its bank deposit rate, from minus 0.3% to minus 0.4%.
The measures, including the decision to cut the main interest rate, were more radical than investors had expected.
The stimulus measures announced three months ago have largely failed to drive economic growth higher or boost inflation.
ECB president Mario Draghi told a news conference in Frankfurt that it had cut eurozone inflation projections to reflect the recent decline in oil prices.
The bank now expected inflation to be just 0.1% this year – substantially lower than the previous estimate of 1% and underlining the need for the bank to go further than expected.
Inflation should rise to 1.3% in 2017 and 1.6% the following year, according to its estimates.
“We are not in deflation,” Mario Draghi stressed.
He also warned that risks to economic growth across the 19 countries that use the euro remained “tilted to the downside”.
The ECB cut its growth forecasts to an increase of 1.4% in 2016 – down from 1.7%; 1.7% for 2017 – down from 1.9%; and 1.8% for 2018.
The governing council expected the bank’s key interest rates “to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases”.
The bond-buying program will continue at least until the end of March 2017.
As well as government debt, the ECB will now be allowed to use its newly printed money to buy bonds issued by companies as well. That scheme will start towards the end of the second quarter this year.
The euro initially fell 1% against the US dollar, but soon recovered to be trading higher and was also up against the yen. A weaker euro makes European exports cheaper, so the rise will not be welcomed by manufacturers.
European stock markets also rose sharply following the announcement before losing much of those gains, with Frankfurt up 0.6% and Paris rising 1%, although the FTSE 100 in London fell 0.2% and Wall Street was flat in morning trading.
Shares in European banks posted gains, with Deutsche Bank rising 4.8%, Societe Generale adding 2.7%, Santander up 5.5% and Italy’s UniCredit adding 6.8%.
Eurozone unemployment fell in July 2015 to its lowest rate in more than three years, Eurostat figures have shown.
According to the EU statistics agency, the unemployment rate in the currency union fell to 10.9% in July from 11.1% the month before.
The fall was helped by a sharp fall in Italy’s unemployment, where the jobless total fell by 143,000.
It is the first time the unemployment rate in the eurozone has been below 11% since February 2012.
The wider 28-member EU saw the unemployment rate fall to 9.5%, the lowest rate since June 2011.
The lowest unemployment rate was in Germany, at 4.7%. Greece had the highest unemployment rate, at 25%, the latest available data from May showed, followed by Spain at 22.2%.
The rate of youth unemployment across the eurozone also declined to 21.9% in July from 22.3% a month earlier.
A survey released earlier on September 1 suggested that growth in the eurozone’s manufacturing sector had eased slightly in August, despite factories barely raising prices.
The closely-watched Markit eurozone manufacturing purchasing managers’ index (PMI) was 52.3 last month, below a preliminary reading that suggested it had held steady at July’s reading of 52.4. However, it has remained above the 50 mark that separates growth from contraction for more than two years.
There was some good news within the data. Germany, the Netherlands, Ireland and Italy all saw strong growth, with Germany’s manufacturing PMI reading jumping to 53.3 in August from 51.8 a month earlier.
The manufacturing figures come almost six months into the European Central Bank’s (ECB) €60 billion-a-month bond-buying program designed to inject new life into the eurozone economy and combat low inflation, which is currently sitting at 0.2%.
With inflation still far from the ECB’s target rate of just below 2%, and looking likely to stay there for the foreseeable future, speculation is growing the bank will have to extend its stimulus program beyond the planned completion in September 2016.