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ECB raises growth forecasts, to start printing money next week

The new European Central Bank (ECB) headquarters is pictured in Frankfurt January 21, 2015. REUTERS/Kai Pfaffenbach

By John O'Donnell and Balazs Koranyi

NICOSIA/FRANKFURT (Reuters) - The European Central Bank will launch into quantitative easing next week having increased its economic growth forecasts for this year and next.

President Mario Draghi said the first bond purchases with new money would take place on March 9.

The euro zone's central bank has said it will buy 60 billion euros a month until Sept. 2016 or until inflation is pushed backed toward a target of close to but below 2 percent.

The ECB, which left interest rates on hold at record lows just above zero at its meeting off-base in Cyprus on Thursday, lifted its growth forecast to 1.5 percent for this year, from the 1.0 percent it predicted in December.

For 2016, growth of 1.9 percent is now expected, up from a previous 1.5 percent.

"The latest economic data, and particularly survey evidence available up to February, point to some further improvements in economic activity at the beginning of this year," Draghi told a news conference.

"Looking ahead, we expect the economic recovery to broaden and strengthen gradually."

An analysis of Reuters polls shows more than half the most important economic data reports from the euro zone since the start of the year have beaten the consensus forecast and many have topped the highest prediction.

Germany, Europe's largest economy, has led the way.

Inflation, now running at -0.3 percent, is forecast at zero this year rising to 1.8 percent in 2017. That is sufficiently close to the ECB's target to suggest money printing will not run beyond Sept. 2016.

The bank has a long way to go to convince markets its plans will be effective. Only half of the economists polled by Reuters think bond buying will help inflation rise toward the target of close to but below two percent and half think the purchases will be extended.

There are tentative signs inflation has bottomed out.

The February reading of -0.3 percent was above forecasts, oil prices have rebounded from January lows, growth is picking up and the euro hit a fresh 11-year low against the dollar overnight, boosting prospects for higher imported inflation.

"The risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices," Draghi said.


The ECB is keen to stay out of the political debate over Greece's future and Draghi signaled the ECB would not allow a plea from Athens to be allowed to issue more short-term debt to get it over acute short-term funding problems.

But he said the ECB had raised the amount of Emergency Lending Assistance (ELA) that the Greek central bank could provide to its banks.

Anticipation of the QE program has driven euro zone borrowing costs down to the point where Spain can borrow for 10 years at under 1.3 percent and investors actually pay for the privilege of lending to Germany for five years. Yields in Italy, Spain and Portugal dropped to record lows this week.

Some analysts have suggested the ECB would distort the bond market by buying bonds with negative yields. Draghi said it would only steer clear of bonds yielding less than the ECB's -0.2 percent deposit rate.

Another concern is whether the ECB will find enough bonds to buy as the market is flush with uninvested cash while banks are under obligation to hold top tier assets, like government debt.

"There may be complexities. We think they are not relevant," Draghi said, noting that more than half euro zone sovereign bonds were held outside the currency area.

Draghi said the ball was now in the court of euro zone governments who must contribute "decisively" to economic recovery with structural economic reforms.

"Decisive implementation of product and labor market reforms and actions to improve the business environment for firms need to gain momentum in several countries," he said. "It is crucial that structural reforms be implemented swiftly, credibly and effectively."

(Additional reporting by Michele Kambas in Nicosia and Paul Carrel in Frankfurt. Writing by Mike Peacock. Editing by Jeremy Gaunt)