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ECB to take cautious tone on economy at policy meeting: analysts

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The European Central Bank, convinced that its controversial bond purchase programme is working, will nevertheless remain cautious about the outlook for growth in the euro area at its meeting on Wednesday, analysts said.

[FRANKFURT] The European Central Bank, convinced that its controversial bond purchase programme is working, will nevertheless remain cautious about the outlook for growth in the euro area at its meeting on Wednesday, analysts said.

The ECB's decision-making governing council is unlikely to announce any new moves at its regular policy meeting, central bank watchers predicted.

Instead, analysts said they would be looking out for what ECB president Mario Draghi has to say about the effectiveness of the programme so far and also the situation in Greece.

"No decisions are likely to be made at the ECB meeting," said Berenberg Bank economist Christian Schulz.

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But he expected Mr Draghi "to take a cautious tone on the economic outlook, offer a clear commitment to continuing quantitative easing (QE) at least until September 2016 and warn governments on structural reforms".

Natixis economist Johannes Gareis agreed.

"We do not expect a policy change," he said. "Draghi will most likely express strong commitment to full QE implementation until September 2016 or even longer."

In March, the ECB embarked on a programme of so-called quantitative easing or QE, buying up 1.14 trillion euros (S$1.71 trillion) in assets - at a rate of 60 billion euros per month - until September 2016.

The aim is to inject liquidity into the financial system and push up the eurozone's chronically low rate of inflation.

Executive board member Benoit Coeure caused a stir two weeks ago when he announced that the ECB could "frontload" - or temporarily ramp up - the purchases prior to the summer drop-off in liquidity.

And Mr Draghi could hint at even more frontloading if the underlying macroeconomic backdrop justified it, analysts said.

According to the minutes of the governing council's last meeting in April, while the central bank chiefs saw a case for "guarded optimism on the short to medium-term outlook for the euro area economy," they still felt it was important "to remain cautious" given the prevailing economic headwinds.

Hence, there is no talk of scaling back QE just yet.

'HARD LINE ON GREECE'

The ECB will publish its latest updated forecasts for growth and inflation in the 19 countries that share the euro.

According to the ECB's last projections published in March, eurozone growth was expected to reach 1.5 per cent in 2015, 1.9 per cent in 2016 and 2.1 per cent in 2017.

But with the single currency area growing by only 0.4 per cent in the first three months, those forecasts could come under pressure or, at best, be left unchanged, analysts said.

"Following a large upward revision in March, the ECB's new staff forecasts should remain broadly unchanged," said Mr Gareis.

"The post-meeting news conference could focus on questions about the flexibility of the implementation of QE and the Greek situation, but we do not expect Draghi to say anything new on the Greek subject," he added.

Mr Draghi attended a meeting of finance ministers and central bank governors of the Group of Seven wealthiest countries in Dresden last week, where the efforts to hammer out a deal and prevent a disastrous "Grexit" or Greek exit from the eurozone took centre stage.

He also took part in a late-night meeting in Berlin with German Chancellor Angela Merkel, French President Francois Hollande and European Commission head Jean-Claude Juncker on Monday.

"We suspect that Draghi and colleagues will maintain a hard line on Greece," said Capital Economics economist Jonathan Loynes.

AFP

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