ECB under pressure to revive growth as U.S. recovery strenghtens

(Reuters) – On one side of the Atlantic they’re trying to refill the punchbowl. On the other they’re getting ready to take it away. This week, investors may get a clearer idea why.

The European Central Bank will spell out on Thursday its latest attempt to steer the euro zone away from the prospect of damaging deflation, following the latest snapshot of consumer price pressures on Tuesday.

U.S. jobs numbers on Friday will probably confirm that the fast-recovering American economy has reached the point where the Federal Reserve can finally halt its massive bond-buying stimulus.

The contrast between the U.S. and euro zone economies has grown increasingly stark, adding to the pressure on the ECB and European leaders to revive growth in their corner of the world.

U.S. Treasury Secretary Jack Lew last week laid bare Washington’s long-standing frustrations with the reluctance of European governments to increase public spending.

The risk of the euro zone sliding into deflation and deeper stagnation is adding to the drag on the global economy from a slowdown in China, where authorities are trying to rein in lending, and concerns about conflict in the Middle East.

But instead of fiscal action by European governments, it is action by the ECB that is the most likely spur for the region.

After surprising markets with an interest rate cut at its September meeting and trying to get banks to take cheap loans to boost lending, the ECB on Thursday is due to give details of its plan to unblock corporate credit by buying repackaged loans.

Marchel Alexandrovich, an economist with Jefferies in London, said investors wanted an idea of the size of the program to buy asset-backed securities and covered bonds. This would help them gauge when the ECB might start buying government bonds, a much more powerful – and controversial – form of stimulus.

Economists have widely ranging guesses as to the size of the program, and Alexandrovich said that the bigger it proved to be, the longer the ECB was likely to hold off from buying government bonds.

Reuters reported this month that initial plans for the ABS and covered bond program foresaw up to 500 billion euros ($640 billion) in purchases.

ECB President Mario Draghi has said the bank wants to push its balance sheet back up to the levels of early 2012, or about 3 trillion euros, compared with 2 trillion euros now.

Tuesday’s consumer price data is likely to underscore how close the euro zone is to succumbing to deflation. Inflation in the 18 countries sharing the currency is expected to fall to 0.3 percent in September, its lowest level in nearly five years.

Economists at Nomura saw “a clear sign that euro area policy makers are losing their grip on inflation expectations”.