After EU summit surprise, all eyes now on ECB

Posted By: Religare
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Following a surprisingly positive outcome at the European Union summit last week, the action now shifts to the European Central Bank (ECB) policy meeting on July 5 with the central bank expected to undertake further policy easing to spur growth in the struggling Euro area, much to the relief of anxious investors.

Now that the political leaders have delivered, the ECB is also expected to back up their good work by announcing further policy action to help stem the region's debt turmoil.

European Union leaders delivered a major surprise at the summit when they agreed on the direct recapitalization of troubled banks by the region's bailout funds as they moved towards the formation of a banking union and end the interdependence between the region's debt ridden governments and banks.

Allowing the bailout fund to directly shore up lenders and the establishment of a regional banking supervisor may take several months or even a year, meaning that more imminent action has to be taken by the ECB to stem soaring borrowing costs and restore investor confidence.

The central bank on Thursday is tipped to cut interest rates by at least 25 basis points to a record low of 0.75 per cent as the euro area slides into a recession. The ECB may also lower its deposit rate to discourage banks from parking excess funds with the central bank and instead boost lending to businesses and households.

Sooner or later, the ECB may also have to resume its controversial bond-buying program to cap surging Italian and Spanish bond yields.

Another issue that remains unresolved is whether Europe's permanent bailout fund, set to kick start operations this July, would be allowed to access ECB funds. If allowed, this may bolster the rescue fund and strengthen the region's firewall against the debt turmoil.

Read more about: eurozone
Story first published: Monday, July 2, 2012, 9:30 [IST]
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