The European Central Bank on Thursday is set to detail its historic $1.1 trillion quantitative easing plan announced in January and present its latest batch of growth and inflation forecasts for the euro area, after what is likely to be an otherwise uneventful rate-setting session now that the drama over Greece has come to a halt.
Following the Governing Council session in the Cypriot capital Nicosia, ECB President Mario Draghi will announce the details of the 'expanded asset purchase programme' under which the central bank will buy EUR 60 billion assets, including euro area government debt, a month.
The move, which met strong opposition from Germany, is set to run from this March till at least September 2016 or a sustained adjustment in the path of inflation which is consistent with" the ECB's aim of achieving inflation rates below, but close to, 2 percent over the medium term.
Further, the ECB statement is likely to be scanned thoroughly for the details of the crucial arrangement of risk sharing of state asset purchases with national central banks.
Even ahead of the QE announcement, debt yields in Eurozone dropped and they keep falling further. Analysts expect some more reduction in peripheral yields, but their future direction is largely dependent on how the ECB structures its bond purchases.
"It is still unclear when the ECB will actually start purchasing bonds," ING Bank economist Carsten Brzeski said. "The crucial question remains whether QE will actually help beyond the pure psychological announcement effect."
According to Brzeski, the negative deposit rate could push banks to search for yield, in turn driving investors to non-euro-denominated assets, consequently weakening the euro. "The most pressing issue is whether market participants are really willing (or able) to sell their bonds to the ECB given that regulatory requirements do not always make it easy to join the hunt for yield," he added.
Draghi is also set to unveil the latest ECB Staff macroeconomic projections, revealing the forecasts for 2017 for the first time. Economists expect the growth outlook to be upgraded, thanks to lower oil prices and a weaker euro. However, the oil price fall could also lead to further reduction in inflation forecasts.
In December, the projection for this year was cut to 1 percent from 1.6 percent and the outlook for 2016 was slashed to 1.5 percent from 1.9 percent. The inflation forecast for this year was reduced to 0.7 percent from 1.1 percent and the outlook for 2016 was cut to 1.3 percent from 1.4 percent.
Euro area consumer prices fell for a third successive month in February, but the pace of decline slowed to 0.3 percent from January's 0.6 percent, preliminary estimates from Eurostat revealed this week. In January, producer prices decreased the most since November 2009.
"It is obvious that these long-term inflation forecasts will increasingly gain importance in assessing the future path of the ECB's monetary policy," Brzeski said. "At some point, long-term inflation forecasts and the bank's commitment to purchase EUR 60 billion assets per month until September 2016 could limit the ECB's flexibility and put it in an uncomfortable situation."
Other economic indicators give out promising signals on the euro area economy. The unemployment rate in the 19-nation currency bloc dropped to 11.2 percent in January, its lowest level in nearly three years. In February, Eurozone economic sentiment strengthened to a seven-month high and loans to the private sector fell at a modest pace in January.
Consumer spending is also strengthening as the improvement in the labor market situation boosts confidence. Figures from Eurostat on Wednesday showed that retail sales grew at the fastest pace in nearly two years in January. Elsewhere, a Markit Economics survey revealed that the private sector activity in all big-four economies expanded for the first time since April 2014.
If the economic situation continues to improve at the current trend, that could raise questions over the need for the QE and policymakers may also be faced with the task communicating an end to stimulus earlier than expected.
"We doubt that the policy will be expanded unless the inflation outlook deteriorates markedly and hence we suspect that its effect will be very limited," Capital Economics economist Jennifer McKeown said. "Indeed, we might have seen most of the benefit, in the form of a weaker euro exchange rate, already."
That said, the minutes of the January meeting had shown that policymakers saw 'heightened risks of too prolonged a period of too low inflation' and were also concerned about the moral hazard linked to the QE. The bank had released the minutes of a rate-setting session for the first time.
Draghi is also likely to face questions from reporters on the ECB's, apparently tough, stance towards Greece. Early February, the bank suspended the waiver extended to Greek public securities used as collateral by financial institutions for central bank loans. However, the bank later raised the support for Greek banks under the Emergency Liquidity Assistance scheme, funding under which is costlier.
The ECB is set to announce the interest rate decision on Thursday at 7.45 am ET and the main refinancing rate is widely expected to be left unchanged at a record low 0.05 percent and the deposit rate at -0.2 percent. Draghi is set to hold his customary post-meeting press conference at 8.30 am ET.
