ECB to stick to stimulus as economic outlook mixed

[FRANKFURT] The European Central Bank is likely to stick to its aggressive stimulus policy at its meeting on Thursday because inflation remains below its target, despite brisker economic growth in the euro zone.

Sources have told Reuters the ECB is likely to nudge up its forecasts for economic growth in the euro zone but trim its estimates for inflation.

The ECB is now forecasting inflation at 1.7 per cent and growth at 1.8 per cent this year. Its mandate is to keep inflation close to but below two per cent, but inflation slowed to 1.4 per cent in May.

The sources said any change would be small, in some cases as little as 10 basis points, reflecting an adjustment rather than an overhaul of the March projections. The ECB declined to comment.

The mixed outlook should strengthen the case for keeping the ECB's policy of bond purchases and sub-zero rates in place, despite growing calls from Germany for a gradual tightening.

"We expect Thursday's press statement to reiterate that an'exceptional degree of monetary accommodation' is still needed,"said Luigi Speranza, an economist at BNP Paribas.

The euro zone's central bank is widely expected to leave its policy unchanged on Thursday, including its 2.3 trillion-euro (S$3.576 trillion) bond-buying programme.

But sources told Reuters last week the ECB will acknowledge the improved economic outlook by removing a reference to"downside risks" in its statement .

Policymakers may also discuss closing the door to further rate cuts, although any decision on that is far from certain, the sources said.

"That would be consistent with changing their views on the growth outlook but would also not be regarded as overly hawkish," said Peter Nagle, an economist at the Institute of International Finance.

REUTERS