The European Central Bank will keep policy unchanged on Sept 8 but will probably respond to pressure for further easing by announcing an extension to its asset purchase programme by the end of this year, according to a Reuters poll.
The bank, which aims to get inflation close to but just below 2 percent, has been buying mostly government bonds for over a year, currently 80 billion euros a month worth, and has cut its refinancing rate to zero and adopted a negative deposit rate.
It has also been providing many hundreds of billions of euros worth of essentially free loans to commercial banks, provided they go on and lend some of the money to customers.
Yet despite all of these measures, August flash euro zone inflation was just 0.2 percent, far below target, and there has been a relapse to modest 0.3 percent quarterly economic growth, with wildly varying performances across member economies.
So far, there have been few signs that Britain’s shock vote on June 23 to leave the European Union has had a material economic impact on the euro zone, Britain’s main trading partner — certainly not enough to trigger major revisions to the ECB’s last set of staff forecasts.
So the ECB is expected to stand pat on monetary policy when the Governing Council meets on Thursday, according to the Reuters poll of around 70 economists taken this week.
The consensus also showed the central bank will hold its refinancing and deposit rates steady at zero and -0.4 percent respectively until the end of 2017.
“The most significant event since the June meeting has been Brexit, however, little economic data is available thus far for July and August; those that are available do not suggest that growth will materially alter in Q3,” wrote Philippe Gudin, economist at Barclays, in a note.
“Our expectation of further policy easing for H2 16 remains in place, but we think that the ECB is more likely to announce it later in the year, at the October or December meeting.”
Asked what the ECB would do by the end of the year, a firm majority of economists said it would extend its monthly bond purchase programme beyond the current planned cut-off date of March 2017.
There were only a few respondents who said the ECB would make other policy changes in the near-term as it is not clear whether more monetary easing will help. ECB officials have not been vocal either with any hints of imminent easing.
Apart from the U.S. Federal Reserve, which appears determined to deliver this year a follow-up interest rate rise to last December’s small step up from zero, most of the ECB’s peers remain firmly in easing mode.
After the shock Brexit vote, the Bank of England completely reversed its stance, abandoning its goal to gradually raise rates and instead chopped them to a record low of 0.25 percent last month, and restarted its asset purchase programme.
The BoE is expected to ease further in the coming months too, putting more pressure on the ECB to follow suit.
RUNNING OUT OF ROAD
About half the economists polled were less convinced about the ECB’s ability to influence growth and inflation now compared with when it announced its quantitative easing programme, while the other half said there was no change in their thinking.
Only two said they were more convinced.
“The economic recovery is ongoing and credit extension has picked up a bit. But all in all, the achievements of monetary policy are modest compared to its enormous efforts,” noted Kristian Toedtmann, economist at DekaBank.
What has also not helped is the euro’s strength, up over 3 percent this year against the dollar. A stronger euro tamps down import prices as well as makes the euro zone’s exports less competitive on world markets.
With the ECB running out of options, the euro’s main driver in the year ahead is expected to be U.S. monetary policy, although the single currency is not expected to slip very much from where it is now.
Only a handful of economists in the poll said the ECB will ease policy again by year-end, either by cutting rates further or expanding its quantitative easing programme or both.
Fewer than two-thirds of those who answered an additional question said the ECB’s controversial policy of setting a negative deposit rate was good for the real economy.
The rest said negative rates, which have put pressure on bank profit margins and have left vast swathes of euro zone government bonds with negative yields, are doing more harm than good.
Source: Reuters (By Rahul Karunakar, Polling by Kailash Bathija and Vartika Sahu; Editing by Ross Finley and Jeremy Gaunt)