The European Central Bank today reduced its interest rates by half a percentage point to 2% as it finally dawned on policymakers there that the economic crisis is coming to Europe fast.

The central bank has been widely criticised in Europe for its failure to cut rates as quickly as its counterparts in Britain and the US. Even after today's cut, they are still far higher than Britain's 1.5% and the near-0% cost of borrowing in the US.

Expectations of today's cut have caused the pound to strengthen greatly against the euro since the New Year. On New Year's Eve, it stood at e1.025 but today £1 was worth €1.153 on the currency markets — up about a tenth of a eurocent.

Economists expect further cuts from the ECB to as low as 1%, although it may pause before its next move. The famously cautious ECB took action after figures showed Germany's economy, the largest in the eurozone, shrank almost 2% in the fourth quarter of 2008.

Inflation across the monetary union area has rapidly dropped in recent months, removing its main reason for not cutting rates. In December declines in the cost of energy bills led to inflation hitting 1.6%, well below the ECB's 2% ceiling.

The eurozone, which is ten years old this month, has been in recession since September. Research published in December found that business activity across the zone was at its lowest level on record.