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 The ECB, meeting in Cyprus, will keep rates on hold and probably
lift growth forecasts to reflect a string of positive data
surprises, But it could cut inflation projections as it incorporates
the full effect of a dramatic oil price fall, backing its case to
buy 60 billion euros worth of bonds a month from March to spur
inflation.
The bank has a long way to go to convince markets its plans will be
effective. Only half of the economists polled by Reuters think bond
buying will help inflation rise towards the target of close to but
below two percent and half think the purchases will be extended
beyond September 2016.
The ECB has said its money printing would last "at least" until
September 2016 and until a "sustained adjustment" in the inflation
path emerges.
Still, there are at least tentative signs inflation has bottomed
out.
The February reading at -0.3 percent was above forecasts, oil prices
have rebounded from January lows, growth is picking up and the euro
hit a fresh 11-year low against the dollar overnight, boosting
prospects for higher imported inflation.
The bank could forecast deflation for 2015, sharply cutting its 0.7
percent inflation projection from December but some analysts said
the actual figure could end up in positive territory, also getting a
boost from the ECB's bond buying.
DETAILS
Markets will be looking for how quantitative easing will work, when
the buying will start, whether it applies to paper with negative
yields and how the purchases will be distributed along the yield
curve.
Anticipation of the QE program has driven euro zone borrowing costs
down to the point where Spain can borrow for 10 years at under 1.3
percent and investors actually pay for the privilege of lending to
Germany for five years. Yields in Italy, Spain and Portugal dropped
to record lows this week.
Another concern is whether the ECB will find enough bonds to buy as
the market is flush with uninvested cash while banks are under
obligation to hold top tier assets, like government debt.
"The massive ECB buying will start in times of stagnating supply at
the bond market," SEB economist Thomas Köbel said. "We see some
risks that the ECB may be unable to buy bonds at the targeted
monthly rate of 60 billion euros."
The buying will start just as European economies appear to have
turned a corner. ECB Executive Board member Peter Praet has already
said the bank will likely lift its growth forecasts.
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Fourth quarter growth beat expectations, recent consumption figures,
particularly in Germany, have exceeded forecasts, sentiment
indicators have turned up while growth is also poised for a boost
from lower energy prices and a weaker euro.
Although ECB money printing is designed to lift the entire euro
zone, some of its hardest hit economies, Greece and Cyprus, do not
yet qualify to use it. Both have been bailed out by their European
Union partners.
On Wednesday, Cypriot president Nicos Anastasiades set out the case
for allowing his country into the scheme in a meeting with ECB
President Mario Draghi, hoping to gain eligibility in the bond
buying within weeks.
As the two spoke, thousands of Cypriots gathered to protest against
what one banner described as an 'experiment' that had created
'unemployment and poverty'.
"A few years ago Cyprus could be described relatively prosperous.
Now we are talking about people struggling to buy food. This troika
(of the ECB, EU and International Monetary Fund) has brought us
nothing but poverty," said Lygia Poullou, 69, a pensioner.
Although struggling Greece will remain a headache, the ECB is
desperate to stay out of the political debate over the country's
future and the return of deposits to Greek banks since Athens
secured an extension to its financial rescue last month has eased
pressure on the bank to act.
(Additional reporting by Michele Kambas in Nicosia and Paul Carrel
in Frankfurt; Editing by Mike Peacock/Jeremy Gaunt)
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