ECB to focus on roll out of QE as Greece deadline looms
European Central Bank President Mario Draghi is set to reaffirm his commitment to quantitative easing and may call on Greece to finally agree a fresh aid deal with its creditors after the ECB left interest rates on hold as expected on Wednesday.
The bank has already said that lifting inflation towards its near 2 percent target depends on full implementation of the scheme, which is due to last until September 2016.
The ECB is also expected to confirm its growth forecasts, while Draghi will try to avoid getting dragged into a lengthy public discussion about Greece, whose government has been wrangling with its international lenders for months.
Deflation, the bank's chief concern, has ended, partly on the rebound in oil prices, and figures in May even surprised on the upside, indicating that negative price growth, a drag on the economy, is nearing its end.
"The risk of deflation is definitely gone, but inflation is unlikely to move back to 2 percent for the foreseeable future," UniCredit economist Marco Valli said.
Draghi is expected to argue that the inflation rebound is dependent on the full implementation of the asset-buying plan, so he will reject any suggestion of tapering or an early end to the programme.
The euro has weakened sharply this week while German 10-year yields DE10YT=RR have jumped more than 20 basis points.
"The reason why we do not expect the ECB to halt its QE purchases before its current intention is that we expect this to require an increase in core inflation and we still believe the ECB is too optimistic on its outlook for core inflation," Danske Bank said.
"However, fixed income markets would be very sensitive to an expected tapering discussion at the end of this year."
Draghi may find Greece a difficult topic to avoid a day after creditors drafted the broad lines of an agreement to be put to the leftist government in a bid to end talks and release aid before Athens runs out of money.
Highlighting the uncertainty, Dutch Prime Minister Mark Rutte said Greece's exit from the euro zone could not be ruled out. Almost simultaneously, Spain's economy minister said he was certain a deal would happen and that "Grexit" wasn't on the table.
Greece itself had sent what it called a comprehensive reform proposal to its international lenders, urging them to be realistic and accept, but euro zone officials said the Greek text was insufficient and not formally on the table.
Greek Prime Minister Alexis Tsipras is travelling to Brussels on Wednesday to discuss the lenders' proposal with European Commission chief Jean-Claude Juncker at a meeting starting at 1830 GMT.
Speaking in Athens, Tsipras said Greece wanted a deal that will give it "the ability to emerge from the economic asphyxiation" and "put an end to Grexit scenarios, to doomsday scenarios".
Greece has a €300m payment to the IMF due on Friday and a series of bigger obligations later in the month, which it is unlikely to manage without aid.