ECB must stay on track to curb economic recovery

FRANKFURT (Reuters) – The European Central Bank is almost certain to confirm plans to end bond purchases this year and raise rates in the autumn, saying the eurozone economy should continue develop after years of recovery.

With inflation rebounding and growth stabilizing at a relatively steady pace, the ECB has been gently suppressing stimulus measures for months, convinced that a range of risks from global protectionism to Brexit was not enough.

Indeed, ECB President Mario Draghi should insist that the expansion is strong enough to absorb unused capacity and generate inflation.

The ECB has bought more than 2.5 billion euros of debt over the past four years, which has lowered borrowing costs and boosted economic growth after a double-dip recession that has almost torn up the monetary bloc of 19 members.

"The quantitative easing should end at the end of this year, especially for political reasons. Therefore, for the message to be consistent, the prospects must remain good, "write Bank of America economists – Merrill Lynch in a note.

The ECB will announce its political decision at 11:45 GMT, followed by the Draghi press conference at 12:30 GMT, during which the quarterly economic projections will also be unveiled.

Eurozone government bond yields for the most part did not change much on Thursday, as the market was largely outside the ECB's decision. The Bank of England and the Central Bank of Turkey were also expected to provide policy updates.

TWEAKS

Despite Draghi's optimism on growth, the bank is expected to trim some of its forecasts after a series of weak numbers over the summer, according to a Reuters survey of economists. Even leading indicators suggest that growth should at best stabilize rather than rebound after a weak start to the year.

Inflation, the singular goal of the bank, is expected to remain on the same track as three months ago, adding to the argument for continuing the policy set in June.

In a somewhat technical move, the bank is likely to say that it will halve bond purchases to 15 billion euros a month as of October, confirming previous forecasts that it would "anticipate" such a decision.

But one could still say that the end of bond purchases this year remains an expectation, and it is almost certain that its forecasts will remain unchanged so that rates remain at historically low levels, at least "until next summer ".

These are unlikely to be of interest to investors as the end of purchasing has been fully taken into account and policymakers have said that extraordinary developments are needed to address these "expectations".

"Although the economic data of the euro area remain uneven and the risks of deterioration of prospects dominate and have even increased slightly, this has been the case for some time," said ABN Amro in a note.

"We believe that economic data or the risk spectrum should take a more severe turn for the ECB to change language."

Draghi could also provide more details on how the ECB will reinvest maturing debt funds, although sources close to the discussion said the decisions would not have a significant impact on the policy.

With the decision on Thursday, the deposit rate of the ECB, currently its main interest rate tool, will remain at -0.40% while the main refinancing rate, which determines the cost of credit in the economy, will remain at zero.