ECB to press case for steady QE, may urge Greece to accept deal

Wed Jun 3, 2015 2:35am EDT Related: GREECE

FRANKFURT | BY BALAZS KORANYI AND JOHN O'DONNELL

Reuters

The European Central Bank is set to raise its inflation forecast on Wednesday, saying that its trillion-euro-plus asset buying program is already paying off, and may urge Greece to accept a new deal from its creditors to access fresh aid.

In what could be the bank's least eventful meeting in months, the ECB is set to keep rates on hold, confirm its growth forecasts, make the case for a steady pace in quantitative easing and discuss Greece only briefly, leaving most of the talking to Brussels.

Deflation has ended, partly on the rebound in oil prices, and figures in May even surprised on the upside, indicating that anemic price growth, a drag on the economy and the bank's top worry, is nearing its end.

"The risk of deflation is definitely gone, but inflation is unlikely to move back to 2 percent for the foreseeable future," UniCredit economist Marco Valli said.

The bank will announce its rate decision at 1145 GMT (7.45 a.m. EDT) and Mario Draghi, its president, will hold a press conference at 1230 GMT.

Draghi is expected to argue that the inflation rebound is dependent on the full implementation of the asset-buying plan, so he will reject any suggestion of tapering or an early end to the program that is set to last until at least September 2016.

"Draghi is set to emphasize once more the sizable easing the ECB is providing, and confirm the more flexible nature of the purchases over the coming months," Nordea said in a note to clients. "The message will leave core yields free to fall back further and the euro to weaken."

GREECE

Though Draghi will not be keen to discuss Greece, he may find the topic difficult to avoid a day after Greece's creditors drafted the broad lines of an agreement to be put to the leftist government in Athens in a bid to end talks and release aid before the cash-strapped country runs out of money.

Greece itself had sent what it called a comprehensive reform proposal to its international lenders, urging them to be realistic and accept, but euro zone officials said the Greek text was insufficient and not formally on the table.

Greece will run out of cash this month without a deal. Although the risk of a default stoking pressure on other vulnerable euro economies is lower than during past bailouts, the broader project of European integration is still at stake.

"The euro was a way of bringing countries closer together but, judged by that standard, it has clearly failed," Sofronis Clerides, an economist with the University of Cyprus said.

"If people feel that being part of the euro is helping economic growth, that will create a more positive attitude towards it."

Greek Prime Minister Alexis Tsipras is expected to travel to Brussels on Wednesday to discuss the lenders' proposal with Juncker.

Greece has a 300 million euro ($335 million) payment to the IMF due on Friday and a series of bigger obligations later in the month, which it is unlikely to manage without aid.

But the impasse in talks has at least been broken with European officials saying that progress is being made on the most critical issues, like pensions, raising hopes that a deal is close or imminent.

(Editing by Ruth Pitchford)