Economic upturn unlikely to curb ECB bond-buying programme

Nascent signs of an economic upturn in the eurozone are not yet convincing enough to persuade policy makers at the European Central Bank to abandon their plans to buy €1.1trn-worth of bonds under their quantitative easing programme.

Better-than-expected figures on industrial production and indications that credit conditions are finally easing have added to a recent wave of optimism about the currency area's recovery.

But slowing up the pace of the bank's €60bn per month bond-buying before a self-imposed deadline of September 2016 will not be on the ECB's agenda when the 25 officials that make up the governing council set policy in Frankfurt on Wednesday, according to people familiar with the situation.

Factory output rose by 1.1 per cent in the euro area in February, according to official figures from Eurostat published earlier this week, matching evidence from business surveys that manufacturers are benefiting from the cheaper euro and the plunge in oil prices. The ECB's closely-watched quarterly bank lending poll showed borrowing standards for companies had eased and that lenders expected loan demand from businesses to surge in the coming months.

"We have a lot evidence of a strong, cyclical recovery," said Frederik Ducrozet, an economist at Credit Agricole. "There's now a lot of hard data and business surveys pointing in the same direction."

The positive economic news has led to speculation that the central bank could trim QE. Yves Mersch, a member of the ECB board, said last week that central bankers could slow the pace of their bond buying if inflation looked likely to rise more quickly than expected.

Eurozone QE was unleashed in January in an attempt to raise inflation from its current level of -0.1 per cent towards the ECB's target of just below 2 per cent. Eurozone central bankers bought €52.5bn in government bonds in March, alongside bundles of 'sliced and diced' loans packaged into asset-backed securities or covered bonds.

Mario Draghi, ECB president, is expected to mention improvements in economic conditions when he meets the press after the meeting. But Mr Draghi is likely to stress the ECB's hopes that inflation will rise close to its target towards the end of 2017 depend on the eurozone's central bank completing QE in its current form.

While surveys suggest businesses are becoming more confident, most at the ECB are likely to want to see firmer signs of a recovery in investment too. "Investment still looks subdued. We are still lacking evidence of a structural recovery," said Mr Ducrozet.

Even the more hawkish policy makers -- Mr Mersch and fellow board member Sabine Lautenschlager, plus the heads of the German, Dutch and Estonian central banks -- are likely to wait at least until June, when the ECB's staff will unveil their latest quarterly projections for the region's economy, before raising the prospect of tapering eurozone QE. Mr Mersch told Boersen Zeitung, a German newspaper, last week the central bank had a "specified a course of action" and would be "sticking to it" for now.

In their March projections, the ECB's staff expected no inflation this year, but think prices will rise by 1.5 per cent in 2016 and further to 1.8 per cent in 2017. They also expect growth of 1.5 per cent in 2015, and to 1.9 per cent in 2016 and 2.1 per cent in 2017.

How the forecasts will look in June remains an open question.

The euro's recent fall against the dollar raises the chances that forecasts will show inflation rising above-target by 2017. At the same time, some policy makers doubt the eurozone's recovery will be as swift as the March projections suggest.

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