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Outgoing Bank of Italy governor Mario Draghi, who will take over at the helm of the European Central Bank (ECB) on Nov. 1, delivers his speech during the "World Day of Saving" event in Rome Wednesday, Oct. 26, 2011. Pressed hard by the EU, Premier Silvio Berlusconi averted a government collapse and reached a deal with allies on emergency growth measures in time for an EU summit on saving the euro. (AP Photo/Mauro Scrobogna, LaPresse) ITALY OUT

Mauro Scrobogna/AP/Mauro Scrobogna/AP

Only two days into the job, the new head of the European Central Bank faces intensifying pressure to act quickly in the face of deteriorating market and economic conditions.

Mario Draghi, the MIT-trained former head of the Bank of Italy, is almost certain to set a darker tone in his first monthly policy meeting on Thursday, regardless of what he decides to do with interest rates for the 17-country euro zone.

Amid worsening financial and fiscal troubles, the bank has also been under increasing pressure to take a more activist role in resolving the European debt crisis that threatens to tear apart the euro zone and remove the ECB's reason for existence.

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Now, the decision by Greek President George Papandreou to hold a referendum on the latest rescue package for his embattled country has rocked capital markets and increased the risk that Greece will be pushed into a messy default on its debt.

It makes for a dangerous political and economic backdrop that may force Mr. Draghi to cut interest rates immediately. But the consensus among analystsis that the ECB will leave rates unchanged for now and continue to steer clear of a bigger role in the bailout . That will set the stage for what is expected to be his first interest rate cut at the bank's next policy meeting in December.

The latest economic data point to a sharper than expected downturn, just three months after the ECB hiked rates last July. Manufacturing fell in October across the euro zone, including in Germany, the region's main growth engine. Germany's jobless rate climbed slightly to 7 per cent, its first increase in two years.

Mr. Draghi's predecessor, Jean-Claude Trichet, left rates unchanged in September. But he set the stage for lower rates at his final meeting, when the bank softened language typically associated with future rate hikes. While still expecting moderate growth, Mr. Trichet acknowledged that this was subject "to particularly high uncertainty and intensified downside risks."

Mr. Trichet "basically cleared the decks" for his successor, said Gustavo Bagattini, a European economist with Royal Bank of Canada in London. He expects to Mr. Draghi to indicate the ECB may have to do more, "especially given that the macro backdrop has been deteriorating."

By contrast, when the ECB boosted rates by a quarter of a percentage point to 1.5 per cent as recently as July – its second increase in three months – Mr. Trichet had emphasized the bank's continuing concerns about inflation and signalled that more increases were in the offing.

Mr. Draghi will likely paint a darker picture.He can also provide ample evidence to the inflation hawks on the ECB's governing council that worries about rising prices have been overdone in the current environment.

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"Inflation is not an issue because there's no inflation," said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y. "The things central banks can hope to control, like core prices, are not rising in Europe."

Earlier in the debt crisis, Mr. Trichet set a more activist role for the central bank, which began buying bonds of Italy, Spain and other troubled countries in the secondary market to stabilize yields. The move prompted the resignations of two top policy makers at the bank, both German.

"It is essential that all parties come together behind the continued active role of the ECB in the secondary government bond market," said Charles Dallara, managing director of the Institute of International Finance, which represents global banks.

"We would also emphasize that lower ECB policy rates at this point would enhance market stability, as well as help bolster faltering regional economic growth."

Mr. Draghi is expected to reaffirm the ECB's commitment to purchasing government debt, but has no intention of further expanding the ECB's market intervention, despite widening spreads amid growing worries of default, analysts say.

"He doesn't want to expand that role [as a buyer of bonds]to make much bigger purchases," said Jennifer McKeown, senior European economist with Capital Economics in London. Nor does Mr. Draghi want the bank to be intervening indefinitely.

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"In the end, it might change, if it comes down to either the collapse of the euro or ECB intervention," Ms. McKeown said.

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