FRANKFURT AM MAIN: The European Central Bank will hold to its course at its first meeting of 2017 Thursday, analysts said, resisting clamour to tighten monetary policy from critics pointing to increasing inflation.
Since December's meeting of the ECB's Governing Council, when it extended mass bond-buying from March to December 2017, price increases in the 19-nation single currency area have picked up.
The increase to 1.1 percent from 0.6 average inflation across the eurozone in December still leaves the indicator well short of the ECB's target of just below 2.0.
Opponents of the bank's ultra-loose monetary policy -- which also includes historic low interest rates and cheap loans to banks -- nevertheless quickly called on the ECB to wind it down.
"It would probably be right if the ECB starts daring to head for the exit this year," German Finance Minister Wolfgang Schaeuble said in a newspaper interview last week.
With above-average inflation of 1.7 percent in Europe's largest economy, German economists and commentators have been the loudest voices calling for a rise in interest rates and an end to the ECB's mass bond-buying.
Countries where inflation has been weaker, like Greece and Italy, would prefer to see the policy continue.
ECB policymakers "will have to try and explain why they are continuing quantitative easing when inflation has been a positive surprise," Sylvain Broyer of Natixis bank told AFP.
"There's a big job to do teaching people about the rise in inflation."
- Short-term effect -
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"The ECB will probably say 'it's all very encouraging but doesn't change our stance,'" analyst Ben May of Oxford Economics told AFP.
"The inflation data are positive and moving in the direction that the ECB would hope," he continued, but "underlying inflation pressures are weak and still not picking up."
Governing Council members noted at their December meeting that much of the increase in inflation forecast for the following months was "contingent on the short-term outlook for energy prices," while "measures of underlying inflation had remained broadly stable at low levels," minutes published last week showed.
Continuing political uncertainty and weak core inflation justified extending QE -- although the council will cut its pace to 60 billion euros ($64 billion) from 80 billion euros per month from April -- and keeping interest rates low, they agreed.
Such technical considerations may be tricky for German politicians to defend in an election year when eurosceptic party Alternative for Germany (AfD) is expected to flourish -- meaning the grumbling from Berlin is likely to grow louder.
"It will get very tough to resist German pressure," said Natixis' Broyer, noting that low interest rates and accelerating inflation would squeeze German savers.
But ECB President Mario Draghi will "emphasise that uncertainty remains elevated and the medium-term outlook has not changed much from last month" on Thursday, wrote UniCredit analyst Marco Valli.
- Winding down -
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Draghi is likely to keep his counsel in the first half of the year, analysts said, riding out high-stakes elections in France, the Netherlands, and possibly Italy as well as the uncertainty created by the UK's Brexit vote and the election of Donald Trump.
Nevertheless, "if we see a consistent run of very strong data, calls will grow" to tie off monetary stimulus, Oxford Economics' May said.
Even then, observers will be waiting until "the second half of the year" before the bank could make a move towards "tapering", or gradually reducing its monthly bond purchases towards zero, he said.
"The point of action is likely to be the autumn, they'll want to pre-announce plans for January three to four months before the end of the year," May predicted.
Some eurozone regions, such as Italy and Spain, are still lagging and in need of further stimulus compared with comparatively strong performance from the German and French economies, Natixis' Broyer pointed out.
But "given that the ECB began QE by justifying it with the question of inflation, everyone expects that it will put an end to it based on the same considerations," he said.
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