The European Central Bank kept interest rates steady on Thursday and is likely to eschew dramatic action to help Italy or other euro zone countries, despite the threat of political turmoil in Rome reigniting the bloc's debt crisis.
At its monthly policy meeting, the ECB held its main refinancing rate at a record-low 0.75 percent, in line with what the majority of economists in a Reuters poll had expected. The attention turns now to a 1330 GMT news conference, held by ECB President Mario Draghi, himself an Italian.
The ECB has singled out the uneven transmission of its record-low interest rates across the currency bloc as its main problem at the moment and any hints on how it plans to address this dilemma will be closely assessed by financial markets.
It also begs the question as to whether a rate cut would have much effect.
"Interest rates are not the problem, but the spread between interest rates in the euro zone's core and the periphery. Not much can be achieved with a cut and the ECB seems to be aware of this," said Michael Schubert, economist at Commerzbank.
Italy's inconclusive election last week exacerbates the divergence and could potentially put an end to the calm the ECB managed to impose with its pledge in September to do whatever it takes to preserve the single currency via potentially unlimited bond-buying.
Only if governments commit to economic and debt-cutting reforms will ECB help be forthcoming and after last week's inconclusive election, there is no government in Italy to do so and even when one is formed, it will struggle to ignore the anti-austerity vote Italians delivered.
"The rules of the OMT are very clear and there is no way the ECB will depart from those rules," Unicredit economist Marco Valli said.
Italian government bond yields ticked down on Thursday as investors put their faith in the ECB's ability to prevent the country plunging into full-blown crisis. Whether true or not, that incrementally eases the pressure on the ECB to act.
Draghi can expect to be peppered with questions at an hour-long news conference following the policy meeting as to whether the unused bond program, dubbed Outright Monetary Transactions (OMT), could soon be deployed.
A Reuters poll of economists showed uncertainty stemming from Italy's election makes it more likely the ECB will have to help struggling countries by buying their bonds at some point but with Spain, not Italy, the most likely recipient.
Although the decision to keep rates on hold met analysts' expectations, a growing minority of respondents - 22 out of 76 expect that, eventually, the ECB will cut its main refinancing to a new record low of 0.5 percent.
The central bank will unveil the latest staff economic projections, which are expected to remain close to the previous round, published in December, which predicted 2013 would be a year of contraction.
Euro zone inflation stands exactly at the ECB's target of just below 2 percent after overshooting it for more than 2 years.
Next year's inflation is currently seen at 1.4 percent and were the estimate lowered even further, pressure would grow on the central bank to push it up by additional easing measures.
While some economic data is dismal - economic output in the 17 nations sharing the euro fell 0.6 percent in the fourth quarter of 2012 - other indicators, including January retail trade, have been better than expected.
Analysts see actions targeted to funneling money to small businesses and consumers as more likely than an immediate rate cut, which might not help the periphery.
"The ECB would prefer to do something to improve the transmission mechanism of monetary policy, which is where the problem is," Unicredit's Valli said. "If you cut interest rates, you'd benefit Germany and a few other countries which don't need it."
One move under consideration is tweaking the rules of securities against which the ECB lends money to banks, but some policymakers - including Bundesbank President Jens Weidmann - are skeptical of the central bank taking additional risk.
"The main problem is that collateral changes imply more credit risk for the ECB, which is controversial," JP Morgan economist Greg Fuzesi said in a note to investors.
(Editing by Mike Peacock)