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ECB under policy pressure from its own forecasts update

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[December 05, 2013]  FRANKFURT (Reuters)  New economic projections from the European Central Bank on Thursday are likely to point to euro zone inflation remaining below target into 2015, raising pressure on the bank to take fresh policy action next year.

The ECB is widely expected to leave interest rates unchanged at its final policy meeting of this year, after surprising markets last month with a cut in its main rate to a record low of 0.25 percent.

With governments slow to respond to the euro zone crisis, the ECB has played a major role in bringing the bloc back from the brink of break-up but now faces resistance to further policy action from its German-led hawkish minority.

November's cut followed a fall in euro zone inflation to 0.7 percent in October  far below the ECB's target of just under 2 percent. It has since picked up to 0.9 percent and unemployment fell in October, offering the ECB a reprieve.

"Mario Draghi is action man," Berenberg bank economist Christian Schulz said of the ECB president. "If he sees a need for action, then he acts ... but the opportunity to do more simply isn't there because the data has improved."

At his 1330 GMT (8:30 a.m. EST) news conference, Draghi will present updated projections from the ECB's staff, which will include their first forecasts for 2015.

The new estimates will give markets insight into the ECB's view on inflation over the medium term, the horizon over which it aims to deliver price stability in line with its target.

Should the new projections point to inflation still clearly undershooting the ECB's target in 2015  analysts expect a forecast of 1.3 or 1.4 percent  expectations will grow that the bank will take fresh action early next year.

Schulz expected the new forecasts to show inflation remaining below the ECB's target in 2015.

"That will raise questions next time Draghi goes to the European Parliament as to why they are not doing more to achieve their own target, and could raise the pressure on the ECB to do more over the coming months," he said.

However, the ECB's hawks would resist further easing.

The ECB is already running up against opposition in Germany, where Markus Soeder, the finance minister of the southern state of Bavaria, said on Saturday the bank's low interest rate policy threatened financial order in the euro zone and caused a "stealthy expropriation" of German savings.

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In the run-up to Thursday's meeting, several senior policymakers have flagged the ECB's readiness to ease policy further if needed, while at the same time playing down the prospect of immediate action.

Peter Praet, the bank's chief economist who begins the rate meetings with a policy recommendation, last month put the possibility of the ECB embarking on asset buys  or quantitative easing on the agenda.

However, another senior ECB policymaker, Benoit Coeure, said last week the ECB does not need to make large-scale asset purchases like the U.S. Federal Reserve given the euro zone's inflation outlook.

The bank's vice-president, Vitor Constancio, has also said the ECB would only cut the deposit rate it pays banks for holding their money overnight  now at zero  into negative territory in an extreme situation.

Constancio dampened speculation the ECB was actively preparing to inject more funds into the financial system, though a Reuters poll last week suggested the ECB will offer banks a new batch of long-term loans early next year.

RBS economist Richard Barwell said the ECB could boost markets' confidence in the central bank's readiness to take further action if it presents a more specific plan of action.

"They will say all options are on the table, but I would prefer it if they were more specific about which options they think they would use  and how and when," he said.

[By Paul Carrel 2013 Thomson Reuters. All rights reserved.]

(Editing by Ruth Pitchford)

Copyright 2013 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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