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ECB's efforts to counter weak inflation will fail - economists

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10/17/2019 | 08:13pm EST
FILE PHOTO: Sign of the European Central Bank (ECB) is seen ahead of a news conference on the outcome of the Governing Council meeting, outside the ECB headquarters in Frankfurt

BENGALURU (Reuters) - The European Central Bank's latest stimulus package will not significantly help to bring inflation back to target, according to economists in a Reuters poll who said the risk of a euro zone recession in the next two years has increased.

At its September meeting, the ECB cut its deposit rate deeper into negative territory and said it would revive its bond-buying programme indefinitely to cut borrowing costs and stimulate investment and growth in the euro zone.

But the decision to restart its asset purchase programme, which was shuttered late last year, was opposed by over one-third of ECB Governing Council members, who questioned its effectiveness.

An overwhelming majority -- 95% of economists who answered an additional question in the Reuters poll -- agreed, saying the ECB's stimulus package would not significantly help in bringing inflation back to its 2% target ceiling.

"The package is unlikely to do much good for the real economy. With short- and long-term interest rates already extremely low, it does seem we are getting to the limits of what the ECB can do," said Jack Allen-Reynolds, senior Europe economist at Capital Economics.

"We are still sceptical this is going to be anywhere near enough to get the economy moving and get inflation up to target."

Economists in the Oct. 8-16 poll expressed concerns about the economy's health and lowered the outlook for growth and price pressures. Inflation last month was at its weakest since November 2016 and was not expected to pick up anytime soon.

Inflation is expected to average 1.2% this year, a downgrade from September's survey and the lowest since polling started for the indicator in January 2017. Next year's inflation forecast of 1.2% was the lowest since polling started for this period in April 2018.

Quarterly inflation forecasts were downgraded for every quarter from now through to end-2020, the first time views had been lowered for each of those quarters since April.

That was despite the ECB pledging to purchase 20 billion euros of bonds monthly from November, alongside a -0.5% deposit rate and a zero percent refinancing rate. The central bank was expected to cut the deposit rate early next year to -0.6% but then leave it unchanged until at least 2022.

"Monetary policy is at or close to its limits so it shows declining returns to scale," said Clemente De Lucia, senior European economist at Deutsche Bank. "This means a combination with fiscal policy would be needed to cause a significant change in sentiment likely to boost investment, activity and then inflation."

The ECB is running out of options for bond purchases as it already owns a huge chunk of the euro zone sovereign bond market and some countries have a scarcity of bonds available to purchase. Under current rules, the central bank can only purchase up to a third of each member country's debt.

Nearly two-thirds of economists who responded to another question said the ECB would end its bond-buying programme in the next two to five years. Nineteen respondents said it would end within two years and three said in 5-10 years from now.

Reuters Poll: Impact of the latest ECB stimulus - https://fingfx.thomsonreuters.com/gfx/polling/1/624/620/ECB.png

Like most other major central banks, the ECB remains concerned about weak domestic demand, the U.S.-China trade war and slowing global growth.

The chance of a recession over the next 12 months rose to 30% from 25% last month, the highest since at least July 2018. The chance of a recession in two years rose to 35%.

Forecasts for other major economies in the bloc were trimmed compared with the previous survey and medians were downgraded or kept unchanged from the previous poll.

Over 95% of nearly 80 common contributors downgraded their 2020 annual euro zone GDP growth forecasts or left them unchanged compared to a poll conducted before the ECB announced additional stimulus in September.

"Euro zone economic growth and inflation seem stuck in a low rut. The ECB is also stuck. With little more stimulus to offer without a high risk of unintended consequences, it is upping the pressure on fiscal authorities to act to boost growth," noted Simon Wells, chief European economist at HSBC.

"But the fiscal authorities themselves are also in a sticky situation: those with the ability to spend are constrained by politics, demographics and, in some cases, domestic law. While a pan-euro zone budget remains as far off as ever."

(Additional reporting by Richa Rebello, Anisha Sheth and Manjul Paul; Graphics by Indradip Ghosh and Mumal Rathore; Polling by Nagamani Lingappa and Sujith Pai; Editing by Jonathan Cable and Catherine Evans)

By Shrutee Sarkar

Stocks mentioned in the article
ChangeLast1st jan.
DEUTSCHE BANK AG 0.55% 6.635 Delayed Quote.-5.28%
HSBC HOLDINGS PLC -1.16% 569.7 Delayed Quote.-10.90%
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