Mario Draghi is set to steer the European Central Bank to a historical interest rate cut on Thursday, but the move may not be enough to satiate the financial markets looking for concrete solutions to the sovereign debt crisis in the euro area.
A rate reduction at this juncture could serve as a back-up to the deal reached by European Union leaders last week that relaxed bailout rules, took steps for more integration, and paved the way for the Eurozone rescue funds to directly re-capitalize banks.
Further, the recent run of poor economic data from the currency-bloc and its main members could be another reason to lower rates. Record-high unemployment, falling manufacturing activity and weakening economic sentiment are among the latest set of dire data implying an imminent recession in Eurozone.
At its meeting in Frankfurt, the Governing Council led by ECB President Draghi is likely to reduce the main refinancing rate by 25 basis points to 0.75 percent. That will be a first in euro area monetary policy as the central bank has never before cut the rate below 1 percent.
Some economists are also looking forward to a reduction in the deposit rate, which is now at 0.25 percent. Another policy rate, the marginal lending facility rate, is at 1.75 percent.
The ECB announcement is due at 7.45 am ET and will be followed by the regular press briefing at 8.30 am ET.
ECB policymakers have increasingly voiced support for a rate cut over the past few weeks. But economists say much more will be needed to pull the economy out of recession.
"A rate cut could be a face-saver in many ways: quid pro quo pretense would be avoided, the opponents of additional liquidity measures would be pleased and probably the most critical economy of the moment, Spain, would receive some relief," ING Bank Senior Economist Carsten Brzeski said.
"In case of a rate cut, it is still uncertain what the ECB will do with the rate corridor, in particular the deposit rate, in this scenario. Zero or even negative rates could be possible but a cut to 10bp or 15bp looks more likely."
Draghi has also ruled out any inflation risk in the euro area. The harmonized inflation figure held steady at 2.4 percent in June, which is above the ECB target of 'below, but close to 2 percent'.
Market sentiment improved after the EU leaders struck the deal late Thursday. Borrowing costs of Spain and Italy, which surged ahead of the summit, have eased. The 10-year Spanish yield breached 7 percent last week.
The Eurozone debt crisis took another turn for the worse early last week with Cyprus emerging as the fifth nation to seek a bailout from the EU. Aid was sought to shore up Cypriot banks struggling from huge exposure to the debt-ridden Greece. Previously, Ireland, Portugal, Greece and Spain have requested EU aid.
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