The European Central Bank will officially extend its asset purchase programme beyond September 2016 in yet another attempt to drive up inflation and rekindle growth, a Reuters poll found. Launched just six months ago, the 60 billion euros a month sovereign bond buying scheme, originally set to end a year from now, has so far failed to pull inflation meaningfully higher or even weaken the euro for a sustained period.
After the financial market rout in August, triggered by concerns China's economy is slowing rapidly, speculation the ECB would ease policy again started to mount - especially with the central bank's policymakers suggesting such a move. ECB President Mario Draghi signalled as much at a news conference after last week's monetary policy meeting, and most economists in the survey predicted he would eventually announce a new end-date for the quantitative easing programme. Many others said the ECB would extend the programme and increase the amount of monthly purchases at the same time, while a few forecast the programme would be increased in size only.
"The likelihood of a change in the ECB's monetary policy stance continues to increase due to developments in China and lower energy prices," said Nick Matthews, senior European economist at Nomura. "We expect the ECB to act again within the next six months by extending QE beyond September 2016. It could increase the amount but we think an extension would impact the longer end of the money market curve by pushing further out when the ECB could begin raising policy rates."
At a time when expectations are high for a US interest rate hike soon, followed by Britain early next year, the ECB is faced with a weak economy that is plagued by very little domestic demand and is hardly generating inflation. But what benefit an enhanced QE programme, either in duration or size, would have is still unclear. Japan has pumped trillions of yen into the economy through various stimulus programmes for over a decade but inflation showed signs of rising only recently and remains far from what policymakers want to achieve.
The poll showed euro zone inflation would rise slightly in the last quarter of this year to 0.5 percent from August's 0.2 percent. Next year it is expected to average 1.2 percent before rising to 1.6 percent in 2017. That 2017 inflation consensus is slightly lower than the ECB's forecast of 1.7 percent and shy of its target of close to but below 2 percent. The most pessimistic economist forecasts inflation at 1.1 percent, barely more than half the ECB's target at that time.
"We think the ECB's projections are still on the optimistic side and it would take longer for inflation to come up," said Matthews, who has the second weakest forecast at 1.2 percent. Global oil prices, which have fallen 8 percent since the start of August after an already historic slump over the last year, and a steadily strengthening euro hardly make the case for a spike in inflation. That, and a sharp slowdown in China is likely to pressure euro zone economies well into the future. The poll also showed the euro zone economy would expand 0.4 percent in each quarter from now until the end of next year, exactly the same as expectations last month.
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