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Weak inflation figures hit euro zone, but not expected to jolt ECB

A picture illustration taken with the multiple exposure function of the camera shows a one Euro coin and a map of Europe, January 9, 2013. REUTERS/Kai Pfaffenbach

By Paul Carrel

FRANKFURT (Reuters) - Weak price pressure in Germany and Spain compounded the European Central Bank's policy headache on Thursday but it is still expected to hold off action next week, waiting to assess the impact of its new round of stimulus.

Brighter euro zone economic sentiment and expectations for a rise in corporate loan demand in the coming quarter offset the bleak inflation readings and gave the ECB some grounds to hold off at least another month before taking any possible further action.

Across the Atlantic, the U.S. Federal Reserve ended its monthly bond purchase programme on Wednesday and dropped a characterisation of U.S. labour market slack as "significant" in a show of confidence in the economy's prospects.

This, along with the ECB's commitment to an expansionary policy with further measures if needed, is keeping downward pressure on the euro, which should in turn support the euro zone economy.

In a sign that support may be beginning to take hold, euro zone economic sentiment unexpectedly rose in October, picking up from a near one-year low in September.

"People who are expecting something next week are going to be disappointed," RBS economist Richard Barwell said of the ECB.

"December is possible, but I think unless the politicians do more, it is going to be a struggle to get a lot more out of them," he added.

ECB President Mario Draghi has urged governments in crisis-hit euro zone economies to shape up their economies with structural reforms but their progress is slow.

The governments' recalcitrance means the ECB is left to do the heavy lifting to get the euro zone economy going.

To help support the flagging euro zone economy, the ECB, which meets next Thursday, has cut interest rates to record lows, offered banks cheap, long-term loans, and begun buying covered bonds.

WAIT AND SEE

The central bank also plans to start buying asset-backed securities, or bundled loans, in November. Reuters reported earlier this month that the ECB was also considering buying corporate bonds.

However, updated ECB staff forecasts come in time for the Governing Council's December meeting - further reason for the policymakers to take a wait-and-see stance and focus on rolling out their latest stimulus measures before doing anything more.

Thursday's data showed inflation in Germany, Europe's largest economy, slowed in October to 0.7 percent - its lowest reading since May. In Spain, a slowing growth rate and falling consumer prices suggested the recovery may be losing momentum.

October inflation numbers for the euro zone due on Friday are expected to show a slight pick-up in the annual rate to 0.4 percent from 0.3 percent a month earlier. The ECB targets inflation of just under 2 percent over the medium term.

In the first hard data from the euro zone showing the pick-up in regional growth is modest at best, figures from Belgium on Wednesday showed its economy expanded at a marginally faster pace in the third quarter after slowing to a near standstill.

ECB policymakers will also take some encouragement from an ECB survey showing companies' demand for loans from euro zone banks rose in the third quarter and is expected to increase further in the final three months of the year.

Rather than debate further measures, the policymakers are likely to focus Draghi's target of supporting the economy by expanding the ECB balance sheet - a means of pumping stimulus into the financial system.

"I think they'll double down on what they have already announced to convince the market they are ready, willing and able to significantly expand the balance sheet," said Barwell.

(Editing by Jeremy Gaunt)

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