The European Central Bank is unlikely to embark on its own bond buying programme but will offer banks another wave of cheap cash early next year through long-term loans, a Reuters poll of economists found on Wednesday. All policy options are open to the ECB and it has discussed the broad possibility of asset buying, Vitor Constancio, its vice president, said on Tuesday after the OECD urged it to consider such action to aid a weak recovery.
But there is only a median 25 percent probability it will do so in the next 12 months, according to the poll of nearly 60 economists taken this week. "There would have to be a real risk of deflation across the euro zone as a whole before the ECB would be willing to engage in quantitative easing," said James Ashley, senior economist at RBC. "At the moment we are looking at inflation well below target but most forecasters - ourselves included - are not expecting outright deflation."
Inflation fell to its lowest in nearly four years at just 0.7 percent in October, prompting the ECB to surprise markets by cutting interest rates to a record low of 0.25 percent earlier this month. The ECB also said it would supply banks with as much liquidity as they need until mid-2015. Over two thirds of economists in the poll said the ECB would conduct another Long-Term Refinancing Operation (LTRO), which allows banks access to cheap cash, probably with a maturity of three years and most likely in early 2014.
Those results echo a Reuters poll of money market traders conducted on Monday. "It would provide extra liquidity to the banks that need it. You wouldn't see the same broad-based-take up you had the first time around, but you probably would see relatively high demand from the Spanish banks, the Italian banks," Ashley said. The ECB injected over a trillion euros into the money supply through two LTROs in late 2011 and early 2012 to prevent a credit crunch, but since the start of this year banks have taken the opportunity to repay over a third of the cash.
Early repayments have diminished the spare money floating around and the amount of excess liquidity, cash beyond what banks and lenders need to cover their day-to-day operations, is now below levels seen before the ECB's first LTRO, according to Reuters calculations. Inflation expectations were slashed dramatically in the latest poll and it was seen considerably below the ECB's 2 percent target ceiling through to the middle of 2015 - the end of the forecast horizon. It will only average 1.4 percent by the fourth quarter next year and none of the economists polled forecast inflation at 2 percent by then, despite expectations the ECB will hold interest rates at rock bottom through to June 2015 at least.
Still, less than half of respondents said any other member countries would join Greece in suffering from deflation. Of those that said yes, Portugal was their most likely candidate. The bloc's economy - which will be enlarged by Latvia adopting the single currency on January 1 - is struggling to recover from its longest-ever recession, which ended this year.
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