ECB stimulus to continue as euro zone economic outlook uncertain

Inflation remains below target, despite stronger economic growth in the euro zone

The European Central Bank (ECB) is likely to keep the money taps fully open at its meeting on Thursday as inflation remains below its target despite stronger economic growth in the euro zone.

The currency bloc's economy has been on its best run for a decade but ECB President Mario Draghi is yet to be convinced that the recent rebound in inflation is durable because wage growth remains sluggish.

Against this backdrop, the ECB is widely expected to keep policy unchanged on Thursday, including its 2.3 trillion euro ($2.59 trillion) bond-buying programme and sub-zero interest rates, despite resistance from cash-rich Germany.

"We expect the ECB to act very, very cautiously when delivering its economic assessment," David Kohl, a currency strategist at Julius Baer, said.

Sources have told Reuters the ECB is likely to nudge up its growth forecasts but trim its estimates for inflation when it presents its new staff projections for 2017-19.

The mixed outlook was seen strengthening the case for keeping the ECB's easy policy in place, including a pledge to cut rates further if necessary to bring inflation back to the central bank's target of just under 2%.

"It raises the probability that the ECB makes no changes to its language of forward guidance at this meeting," economists at Nomura wrote in a note to clients.

The euro was steady against the dollar, not far below a seven-month high of $1.1285 hit earlier this month.

Cautious

Among other factors making the ECB cautious are big debts overhanging governments and companies, the piles of unpaid loans weighing on banks in countries like Italy and Portugal and political uncertainty ahead of elections in Germany and Italy.

Sources told Reuters last week the ECB will acknowledge the improved economic outlook by removing a reference to "downside risks" in its statement.

But any announcement on its quantitative easing (QE) programme is likely to be put off until the autumn when policymakers hope the economic picture will have become clearer. Asset purchases under the programme are due to continue at least until December at a pace of 60 billion euros per month.

"We still expect a compromise to be reached, implying more QE into next year, but at a reduced monthly pace," economists at Societe Generale said in a note.

"While data-dependent, we also expect further quarterly 10 billion euro reductions, ending QE in September 2018."

Draghi is also certain to face questions about failing Spanish lender Banco Popular, which was bought by rival Santander on Wednesday in an ECB-orchestrated rescue.

Investors were wondering if the ECB move on Popular would have implications for two struggling banks in Italy's Veneto region, which like Popular are weighed down by bad loans.

Hours after the Popular's rescue, sources have told Reuters Italian banks are considering assisting in a rescue of Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros of private capital into the two regional banks.