September 24, 2015 / 8:00 AM / 4 years ago

Euro zone growth seen above trend but ECB to increase QE -PIMCO

LONDON, Sept 24 (Reuters) - The euro zone economy will grow faster than its long-term trend over the coming year but persistently weak inflation will likely require the ECB to apply more bond-buying stimulus, bond fund giant Pacific Investment Management Co said on Thursday.

Strong domestic demand and a more favourable impulse from fiscal policy will help the 19-nation bloc’s economy to expand at a real rate of 1.75 percent, PIMCO said in its latest quarterly Cyclical Forum outlook.

That is up slightly from its outlook in March.

But with inflation rising to only 1.25 percent from almost zero now, the ECB will be forced to increase bond purchases by an extra 10 billion euros a month to 70 billion ($78 billion), or extend the “quantitative easing” programme beyond September 2016 into 2017.

The European Central Bank’s inflation target is just under 2 percent over the medium term.

“The ECB’s policies are gaining traction. The cumulative amount of money that will be injected into the economy via QE is equivalent to about 10 percent of gross domestic product ... a considerable amount of stimulus,” managing director Andrew Bosomworth said.

“QE and negative interest rates are a powerful combination, and six months into the programme there are already some tentative signs of success,” he said.

Earlier this week the Newport Beach-based firm cut its forecast for U.S. growth and said the Federal Reserve may find it impossible to escape the effective lower bound of policy rates.

PIMCO also said it expects growth in China, the world’s second largest economy, to slow to between 5.5 and 6.5 percent in the coming year from around 7 percent currently.

Reflecting its view that euro zone interest rates will stay lower for longer, PIMCO said it has an overweight position in Spanish and Italian government bonds, and is underweight the euro.

PIMCO expects the UK economy to expand at an above-trend pace of 2.5 percent over the next 12 months, continuing its “classic” recovery spurred by low mortgage rates and improving consumer confidence, consumer spending and businesses investment.

Still, low inflation will stay the Bank of England’s hand. PIMCO expects the BoE will only start raising rates in May next year. ($1 = 0.8974 euros) (Reporting by Jamie McGeever; Editing by Ruth Pitchford)

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