New European Central Bank President Mario Draghi, who takes over from Jean-Claude Trichet on Monday, is expected to boost the bank's efforts to battle the eurozone's debt problem by cutting key refinancing rates in the next few months, analysts say.
"We expect the ECB to cut key interest rates this Thursday or at the next meeting of the Governing Council in December 2011," VTB Capital analyst Alexey Moiseev said on Monday.
The 17-country bloc's central bank increased its rates in July and April, when it became the first major central bank to raise interest rates after the intensification of the financial crisis. In September, the ECB kept the rate unchanged at 1.5 percent amid growing concerns over the eurozone's economic recovery.
Trichet, who has held the position of ECB president since 2003, was criticized for raising rates as the move was inefficient, said Moiseev.
"Market participants forecast that ECB policy would soften and the ECB rate will be reduced to 1 percent from the current 1.5 percent by the beginning of next year," said Sergei Karykhalin of TKB Capital.
"The possibilities for EU countries to support local economies will shrink due to anti-crisis measures imposed to reduce budget spending, which will negatively influence economic growth. This is why the ECB is expected to stimulate growth by lowering interest rates."
Earlier in October EU leaders agreed the enlargement of the European rescue fund, the European Financial Stability Fund, to up to 1 trillion euros, and reached a deal with private creditors to write off 50 percent of Greece’s debt in exchange for over a 100 billion euro recapitalization.
Karykhalin said the anti-crisis program approved at the summit gives Draghi a good chance of showing his worth, while Moiseev said Draghi would have to boost the ECB's contribution to fighting the crisis as it has done almost nothing so far.
In August, the ECB started purchasing Italian and Spanish debt after yields soared to euro-era records on concerns the countries could become the next victims of the debt crisis that has already claimed Greece, Ireland and Portugal.
This summer, Italy's public debt reached a record 1.9 trillion euros, some 120 percent of gross domestic product. Analysts said it would be necessary for Draghi, a former head of Italy's central bank, to be unbiased, because debt-burdened Italy is in dire need of help.
"Italy is unlikely to receive any preferences, as the country is already getting help because of the huge level of its state debt," said Investcafe analyst Anna Bodrova.
Karykhalin expects the ECB to continue purchasing Italian bonds, "but Italy, the EU's third largest economy, should in return make every effort to put its budget figures right or Draghi may be accused of bias".
World markets are not expected to react strongly to Draghi's accession, as so far he has not made any significant statements. The Russian ruble rate and stocks traditionally follow international floors, so "the better things are going in Europe, the better things are going in Russia," said Moiseev.
"Mr. Trichet has proved to be an extremely careful politician in the monetary world, which helped reduce speculative market reaction to some of his statements or actions on European monetary policy. Mario Draghi, meanwhile, is a more active monetary politician, and although he has previously said he intends to continue current ECB policy , his views might have changed towards more aggressive action over the past couple of months," Bodrova said.
