ECB seen expanding stimulus amid Trump, Italy uncertainties

In this picture taken while turning the camera the Euro sculpture stands in front of the European Central Bank in Frankfurt, Germany, on March 18, 2014. (AP / Michael Probst)

FRANKFURT -- Faced with weak growth and inflation across the 19-country eurozone, the European Central Bank is expected to extend its stimulus program for at least another six months when it concludes its latest policy meeting on Thursday.

Last month's victory by Donald Trump in the U.S. election and the uncertainty generated by the recent Italian referendum, which prompted Premier Matteo Renzi to offer his resignation, will make the decision all the more straightforward, analysts say.

Though Trump's victory has helped revitalize stock markets, there are concerns that his approach to trade may hurt global growth.

And Renzi's hefty defeat in the vote on constitutional changes he hoped would streamline decision-making in Italy has piled pressure on Italian banks, with the third-largest, Monte dei Paschi di Siena, scrambling to secure money to plug a black hole.

A decision to not extend the ECB's stimulus program -- in which it buys 80 billion euros ($86 billion) in bonds a month -- past the current March deadline could worsen concerns about Italy, an economy that's barely grown for years.

"The fallout from a Trump presidency on global growth and the impact of the Italian referendum on the banking system has increased the risks around the growth outlook," said Ben May, lead eurozone economist at Oxford Economics.

As a result, May said, the ECB will likely take a "cautious response" to handling the expiration of its stimulus efforts.

ECB President Mario Draghi has already indicated that the bank's future stance will be clarified on Thursday, when it will have compiled new inflation and growth forecasts.

A decision to extend the stimulus program is facilitated somewhat by a global rise in bond yields following Trump's victory that makes more bonds available for the ECB to purchase.

Analysts said an extension from the stimulus program's current end-date of March 2017 could be accompanied by an explanation on how the bank brings it to an end. Many expect the bank will start tapering off the purchases after the anticipated six-month extension to avoid a cliff-edge end to the program that could jolt markets.

The main aim of the ECB's government and corporate bond purchases is to keep market borrowing rates low and boost lending, which in turn stoke inflation and, ultimately, growth.

The evidence of success is mixed.

At 0.3 per cent in the third quarter of the year, the eurozone's economic growth is still anemic. Unemployment, however, is falling consistently across the eurozone, especially in Spain and Greece, two economies battered by the region's recent debt crisis.

There are also signs that the stimulus is nudging up inflation, though the rise in oil prices over the past year has been the main factor. In the year to November, consumer prices across the eurozone rose by 0.6 per cent. Though still way below the ECB's target of just below 2 per cent, November's annual rate was the highest in two and a half years.

"We firmly believe that the ECB will come out on the side of 'supporting the economy' in order to achieve their main inflation target," analysts at RBC Capital Markets said in a note.

Pylas contributed from London