Eurozone inflation outlook ebbs, but ECB to stand pat

Long-run expectations for euro zone inflation have ebbed to their weakest in around three years as the growth outlook remains tepid, according to a Reuters poll of economists on Wednesday. The vast majority of more than 60 economists surveyed this week, however, do not expect the European Central Bank to cut interest rates - either its main refinancing rate or deposit rate - to new record lows.
The poll also suggested the euro zone economy will return to only modest growth in the second half of this year after stagnating in three months from May to July. The biggest change came in the outlook for inflation, which has declined markedly over the last few months, well under the ECB's preferred target of close to, but just below 2 percent.
The poll showed inflation will average 1.4 percent this quarter and next, and slip further to just 1.3 percent in the final three months of the year. Overall, the median inflation outlook is around 30 basis points lower compared with April's poll. But only a little more than a quarter of economists in the poll expect the ECB will cut its main refinancing rate again, to below the current 0.5 percent.
"It probably would not really help that much, because of the ECB's transmission problem," said Petr Zemcik, director of European economics at Moody's Analytics, referring to the spreading of benefits equally throughout the zone. "The policy rate is low, but loan interest rates in Spain and Italy are still high. So lowering the policy rate with the intention of boosting output is probably not going to work anyway."
Only three economists in the poll said the ECB will cut its deposit rate below zero, which would mean charging banks for parking money at the central bank overnight as an incentive for them to lend. Although the ECB has said it is technically prepared to do this, the majority of economists believe it could cause complications for banks and bond markets.
Zemcik said the ECB would probably instead try to revive the asset-backed securities market as a means of helping small- and medium-sized companies get credit. There was less agreement on whether the euro zone will escape its recession imminently, after seven quarters of economic contraction. Business surveys last week showed euro zone companies still struggled for new orders in May, meaning a rebound looks unlikely soon.