The European Central Bank’s latest offers for long-term cash won’t revive lending in the region despite expectations for strong demand, a Reuters poll showed.
ECB president Mario Draghi announced several new policies this month, including cutting interest rates to record lows and offering a new series of long-term loans known as targeted long-term refinancing operations (TLTROs).
But even with the new measures, economists saw a one-in-five chance of the eurozone slipping into deflation in the coming year, up from the 15 per cent likelihood they predicted in a poll three months ago.
“On themselves, we don’t expect the ECB measures to work miracles. They only tackle any potential liquidity shortages, but they don’t provide capital relief for banks,” said Elwin de Groot, economist at Rabobank.
All but six of the 36 economists who answered an extra question said they expected banks to borrow at least half the roughly €400 billion the ECB is offering, in the hope of encouraging more lending.
On several dimensions the eurozone economy is doing worse than Japan did in the 1990s
But a slim majority, 21 of 38 economists, do not expect that to boost lending in a meaningful way, suggesting the ECB needs to look beyond these measures to push up inflation.
On Monday, a further slowdown in eurozone inflation was confirmed – just 0.5 per cent in May on the year – keeping them in the ‘danger zone’ of below one per cent, half the ECB’s mandate.
And inflation is not expected to rise above that danger zone at least until next year, according to the poll.
The ECB’s own staff project consumer prices to rise just 0.7 per cent in 2014 and 1.1 per cent in 2015. It is projected to rise just 1.4 per cent in 2016 - still below its target of below but close to two per cent.
Although three eurozone countries – Greece, Portugal and Cyprus – are already seeing prices fall, ECB officials repeatedly have said there is no risk of this spreading to the entire region.
The poll respondents were unconvinced, however.
“On several dimensions, the eurozone economy is doing worse than Japan did in the 1990s,” wrote Martin van Vliet, senior economist at ING Financial Markets, in a note.
He added that “this means that, despite recent ECB action, the risk of mild Japan-style deflation has not disappeared yet.”
Another concern for the ECB is feeble economic growth, which dipped to a quarterly rate of 0.2 per cent in the first three months of the year, half the expected pace.
Quarter-on-quarter economic growth is expected to run between 0.3 to 0.4 per cent for the rest of the year.