ECB seen holding fire to assess impact of new measures
By Paul Carrel
FRANKFURT, Nov 4 (Reuters) - The European Central Bank will hold off on fresh policy action when it meets on Thursday, waiting for updated ECB staff forecasts next month and traction from its latest stimulus measures before any possible further steps.
The piecemeal rollout of the new stimulus and the impending update of the forecasts preclude fresh measures for now, even if euro zone inflation of just 0.4 percent - far below the ECB's 2-percent target - and economic stagnation may argue for action.
"We're not expecting the ECB to be following in the footsteps of the Bank of Japan and announcing any further surprise easing measures this week," said Nomura economist Nick Matthews.
The Bank of Japan surprised global financial markets last week by expanding its stimulus spending, with the board voting 5-4 to accelerate purchases of Japanese government bonds in an effort to support the moribund economy and inflation.
The euro zone economy is also struggling to grow. Yet the fractious nature of the ECB's Governing Council makes it harder for the Europeans to agree further stimulus. They would certainly not do so with a margin as narrow as the Japanese.
The ECB has already cut interest rates to record lows, offered banks cheap, long-term loans and begun buying private-sector assets.
The bank has now completed two weeks of covered bond purchases and plans to start buying asset-backed securities - or bundled loans - later this month. In December, it will offer banks a second bite at the cheap, long-term loans, or TLTROs.
However, ECB sources have told Reuters that the bank's plan to buy the private-sector assets may fall short of its goal and pressure is likely to build for bolder action early next year, with government bond purchases an option.
ECB President Mario Draghi has said he wants the latest purchase plans, together with the provision of new cheap loans to banks, to increase the ECB's balance sheet towards its levels of early 2012 -- up to 1 trillion euros higher than today.
In a letter to a member of the European Parliament, dated Nov. 3, Draghi said the purchase plans and the cheap ECB loans to banks "will have a sizeable effect on our balance sheet."
But he added: "The ECB does not have a precise target for the overall size of the balance sheet or for each of the individual programmes."
Draghi must overcome resistance from hawkish members of the ECB Council - led by Bundesbank chief Jens Weidmann - if the ECB is to implement further stimulus. Downward revisions in the ECB staff forecasts next month could bolster the case for action.
In September, the ECB staff forecast growth of 0.9 percent this year and 1.6 percent in 2015, with inflation of 0.6 percent this year accelerating to 1.1 percent next year.
"I think the projections are going to increase the pressure on the ECB to respond with additional easing," Matthews said.
"That could come in the form of a broadening of its asset purchases in December with a move to undertake a corporate bond programme, most likely in the first quarter of next year."
(Editing by larry King)
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