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Europe's worsening inflation outlook spurs calls for ECB action

The European Central bank will "review and possibly reconsider" it monetary policy stance when it next meets in March because of weaker-than-expected inflation dynamics in the eurozone, ECB President Mario Draghi said on Thursday.

[LONDON] Analysts at Mizuho International Plc and Royal Bank of Scotland Group Plc stepped up calls for more monetary stimulus as an indicator of the eurozone's inflation outlook derived from forwards languished near a three-month low.

The five-year, five-year forward inflation swap rate- which measures the five-year price-growth outlook five years from now - fell this week to the lowest since October. The market turmoil spreading from China since the start of this year is weighing on the measure, which strategists say is heaping pressure on the European Central Bank to act.

ECB officials led by President Mario Draghi will increase the pace of their bond-purchaseprogram at March's policy meeting, according to Peter Chatwell, head of rates strategy at Mizuho in London. RBS predicts 0.4 percentage point of cuts to the central bank's minus 0.3 per cent deposit rate, and sees the region's bonds rallying as a result.

ECB Chief Economist Peter Praet wrote in a guest commentary in the Sueddeutsche Zeitung newspaper on Tuesday that slow inflation was damping the longer-term outlook and that there'd be no change to the policy of targeting price growth of just under 2 per cent a year.

"We expect to hear further dovish overtures from key Governing Council members, such as Praet and Draghi, over the coming month," Mizuho's Chatwell wrote in a note on Wednesday. In March, "we expect the ECB to increase the pace of the public- sector purchase program. If they do not, we expect inflation expectations will fall even further." The ECB's rate cut and extension to quantitative easing at its meeting last month fell short of some investors' expectations, sending German 10-year bund yields surging from near a seven-month low.

The yield on the bund maturing in August 2025 fell two basis points, or 0.02 percentage point, to 0.52 per cent as of 12:10 p.m. London time. The 1 per cent security rose 0.14, or 1.40 euros per 1,000-euro face amount, to 104.49.