There is an even chance the European Central Bank increases the size of its €60 billion a month bond buying programme next month, economists in a Reuters poll said, although another deposit rate cut is almost certain.
Expectations of further easing from the ECB picked up last month after president Mario Draghi signalled the bank could add more stimulus at its March meeting thanks to fading prospects for inflation and growth as financial markets convulse.
A global stock market rout since the start of this year has already sent benchmark German bund yields to its lowest in nearly a year.
But, while a deposit rate cut of 10 basis points by the ECB to -0.40 per cent is priced in, economists polled this week are less clear on whether it will increase the size of its asset purchase programme from the monthly €60 billion now.
The near-certainty of that deposit rate cut pushed Sweden’s Riksbank yesterday to cut its repo rate to -0.50 per cent, lower than expected. Some economists noted expanding QE is politically sensitive and the ECB can only buy more if the parameters of the asset purchase programme were changed, something considered difficult due to opposition from Germany.
Still, the median probability of more QE at the March meeting was just over 50-50, about the same as in a snap poll conducted soon after the ECB meeting in January despite a powerful sell-off in share prices since then.
“An additional amount of €20-30 billion (a month) would seem necessary in order to have some market impact,” said Elwin de Groot, economist at Rabobank.
The poll predicted the ECB would increase the monthly purchases to about €75 billion a month in total, if it went through with more stimulus. The range of forecasts were for an increase of between €10 billion to €30 billion a month to the current €60 billion.
The ECB has already purchased mostly sovereign bonds worth about two-thirds of a trillion euros and extended by six months the planned end-date of the programme to March 2017, hoping to lower borrowing costs, spark credit growth and boost inflation.
But beyond a slight bump in inflation and private sector loans, mainly mortgage lending, the money printing and other measures that include deposit rate cuts have had little impact on the economy so far.
A vast majority of economists, however, predicted the ECB would cut the deposit rate to -0.40 per cent in March, although they countered the negative deposit rate would be ineffective in bringing inflation back to the ECB’s near two per cent target.
Inflation was 0.4 per cent in January.
Nineteen of 29 economists in the poll said the risk of eurozone inflation falling back to zero or lower this year was high.
Seven said the risk was moderate. while three picked low.
Marius Gero Daheim of SEB cites Switzerland and Japan as examples where negative interest rates have had the self-defeating consequences of higher consumer borrowing costs and a momentarily weakening currency, respectively. “Ultimately, it will be oil and energy prices which will allow the ECB to get inflation back to target. Until we see a convincing recovery of crude prices, ECB policy is largely symbolic,” he added.
With oil prices expected to remain tepid, the outlook for inflation in the monetary union has worsened. The poll forecast inflation would likely average 0.2 per cent in this quarter and fall to zero between April-June. Gross domestic product growth is expected at a constant 0.4 per cent quarterly rate from now until Q2 2017.