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ECB is set to extend QE well into next year as it struggles to kickstart inflation

The European Central Bank is expected to extend its trillion-euro bond-buying program beyond March 2017 and announce to expand the universe of eligibile bonds as part of its seemingly never-ending struggle to kickstart the euro zone's economy.

The central bank and its President Mario Draghi has been trying to push inflation back to its goal of below but close to 2 percent with a plethora of measures and instruments ranging from negative deposit rates to spur lending, a quantitative easing (QE) program that has been buying 80 billion euro ($89 billion) in bonds every month and interest rates close to zero - but without a breakthrough success.

Analysts believe the ECB's governing council has its work cut out when it meets to decide on monetary policy Thursday. The headline rate of inflation remained unchanged at 0.2 percent in August. Core, or underlying inflation, which excludes energy, goods, alcohol and tobacco, fell from 0.9% in July to 0.8%, according to Eurostat.


European flags flutter in front of the headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany
Daniel Roland | AFP | Getty Images
European flags flutter in front of the headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany

The eurozone economy slowed slightly in August as Germany's services sector faltered, according to surveys of purchasing managers, expanding at the weakest pace in 19 months. Amid the factors for the cooling of the economy is the UK's decision to leave the European Union which may have dampened the currency area's modest recovery.

"We think the ECB will expand the duration of its QE programme from March 2017 currently to September 2017," Nick Kounis, Head of Macro and Financial Market Research at ABN Amro writes.

"The ECB will most likely also need to announce changes to its QE programme to increase the universe of eligible assets as it will not be able to meet even its current targets under the current structure."

This could be by either buying into bonds yielding less than the deposit rate or by buying bonds below the two years' maturity, he added.

"The survey data will fuel expectations that the ECB would prefer not to wait before injecting more stimulus into the economy, adding pressure for policymakers to act later this week to help shore up confidence in both the outlook for the economy and the bank's commitment to its inflation target," said Chris Williamson, Markit's chief economist.

A poll of 70 analysts conducted by Reuters earlier this week forecast that the ECB will take no action when it meets Thursday but will extend its QE program by the end of the year.

Also on the menu are new projections for inflation and economic growth by the region's central bank.

The new staff projections will digest the developments of the last three months and will most likely see a downward revision for growth.

"ECB's staff projections in June indicated 1.6 percent GDP (gross domestic product) growth for 2016 and 1.7 percent for 2017. Given economic developments over the past three months, my guess is that ECB staff's projections will be revised downwards, " writes Lorenzo Codogno, Chief Economist at LC Macro Advisors, adding that inflation as well will see a slight downward corrections, he added.

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