ECB glimpses reasons for optimism but keeps ammunition ready

By Francesco Canepa and Balazs Koranyi

VIENNA/FRANKFURT (Reuters) - The European Central Bank nudged up its 2016 growth and inflation forecasts on Thursday, arguing that the risks facing the economy had declined and supporting expectations it would keep further stimulus under wraps at least until the autumn.

Keeping rates unchanged deep in negative territory, ECB President Mario Draghi argued that more stimulus was still coming from measures approved but not yet implemented, effectively dismissing calls for more ECB action and maintaining his argument for patience.

The ECB already plans to buy 1.74 trillion euros ($1.94 trillion) worth of assets in an attempt to revive inflation and kick-start growth. It had been worried that the 19-member euro zone was at risk of falling into a hard-to-break deflationary spiral.

Next week it starts buying corporate bonds and will offer ultra-cheap loans in late June, both measures aimed at cutting funding costs for corporate clients to induce investment and boost hiring.

Yet Draghi's carefully nuanced statement underlined how fragile that recovery remains and how vulnerable it is to risks, including a slowdown in the global economy and possible fall-out from Britain's June 23 EU referendum.

"Additional stimulus ... is expected from the monetary policy measures still to be implemented and will contribute to further rebalancing the risk to the outlook for growth," Draghi said.

"The risks to the euro area growth outlook remain tilted to the downside, but the balance of risks has improved on the back of the monetary policy measures taken and the stimulus still in the pipeline," Draghi said, inserting a slightly more optimistic description of risk than recently seen.

Draghi also said the bank has not seen low oil prices feeding into wages, a key concern for policymakers as such a second round effect would signal a loss of confidence in the ECB's ability to return inflation back to its target of close to 2 percent.

"Overall, the statement chimed with the 'patience' ECB President Mario Draghi mentioned in April," BNP Paribas economist Luigi Speranza said.

"The changes in the ECB’s June press statement gave us the sense that the ECB is becoming more confident in its central scenario of a moderate, but steady euro zone economic recovery," Speranza added.

The ECB upgraded its 2016 euro zone growth forecast after first quarter growth beat all expectations, seeing a 1.6 percent expansion, above the 1.4 percent it predicted in March. It kept its forecast of 1.7 percent for next year unchanged while trimming it for 2018 to 1.7 percent from 1.8 percent.

It also raised its 2016 inflation forecast to 0.2 percent from 0.1 percent, citing factors including the base effect of a recent rise in oil prices.

MORE EASING?

Inflation has missed the ECB's target of nearly 2 percent for years as high unemployment keeps a lid on wages, high debt levels choke investment, demand for goods and services remains weak and sharply lower oil prices drag down input costs.

With only modest changes to forecasts, Commerzbank chief economist Jörg Krämer called Draghi's stance 'forced optimism' that will not prevent another round of stimulus.

"We still see the bank loosening the reins yet again towards the end of the year," Krämer said. "It is likely to continue buying bonds beyond the mentioned end date of March 2017. And it could cut its deposit rate once more."

While the ECB kept its longer-term inflation projections unchanged, it cut its outlook for underlying or core price growth, also lowering its forecast for consumption and government consumption, suggesting persistent slack in the economy.

"By September, we think that the central bank will feel enough pressure to confirm that quantitative easing will be extended beyond March 2017," JPMorgan economist Greg Fuzesi said.

"This will be motivated by two things: first, the need to add further monetary support due to the lackluster inflation outlook and, second, because ending QE in early 2017 would likely cause an unwanted tightening in financial conditions."

Asked at the news conference for the Bank's stance on a possible exit of Britain from the European Union, or Brexit, Draghi said the ECB was ready for such an eventuality but believed it was economically preferable for Britain to remain in the bloc.

In its next move, the ECB starts buying corporate debt on June 8, probably starting small before ramping up as more issuers come to the market. Then it will offer longer-term refinancing operations (TLTRO) towards the end of the month, giving banks access funding at zero or negative rates.

Draghi also said the bank had postponed a decision on whether to grant euro zone-member Greece, currently in the throes of protracted negotiations with lenders over economic reforms, access to cheap money.

He said it would be discussed after lenders had determined whether Athens had adopted the agreed reforms.

(Writing by Mark John; Editing by Jeremy Gaunt and Toby Chopra)

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