Deposit rate cut, targeted LTRO in June could boost euro zone lending-Reuters poll

Wed May 28, 2014 10:48am EDT

* ECB to ease policy in June, cut refi, deposit rate

* Deposit rate cut with targeted LTRO for business could boost lending

* Policy easing to have marginal impact on euro

By Sumanta Dey

BANGALORE, May 28 (Reuters) - Bank lending in the euro zone is likely to rise if the European Central Bank as expected cuts its deposit rate into negative territory and launches a refinancing operation aimed at businesses, a Reuters poll showed on Wednesday.

Expectations the ECB will act at its June 5 meeting rose after President Mario Draghi gave a clear signal earlier in May that the Governing Council would be comfortable with cutting rates next month if warranted by its new inflation forecasts.

So far the central bank has steered clear of easing policy even as inflation dipped to less than half the ECB's target of just under 2 percent and a stronger euro made prices of goods and services in the 18-country currency bloc even cheaper.

But with growth and inflation showing little signs of picking up, and a liquidity crunch in money markets that are largely devoid of inter-bank lending, the ECB may have to fire what little ammunition it has left.

Thirty-one of 48 economists in the poll conducted this week said the expected combination of a cut in the deposit rate below zero and new long-term cash for banks to lend on to small and medium-sized firms would help boost lending in the euro zone.

The ECB previously lent over a trillion euros to banks via two similar three-year refinancing operations in 2011 and 2012. But banks that took funds then have already paid back over half the cash, long before repayment is due, suggesting the cheap loans did little to spur lending and growth in the economy.

The ECB is expected to cut its deposit rate to -0.10 percent in June from the current zero percent while its refinancing rate is likely to be cut to 0.10 percent from 0.25 percent now.

By cutting the deposit rate below zero, the ECB will essentially be charging banks to park funds with it overnight. That should - at least in theory - encourage them to lend to businesses and consumers instead.

"A rate cut accompanied by some targeted liquidity operation could help to address the mounting evidence of a credit crunch in the stressed member states," said Thomas Harjes, economist at Barclays Capital.

Experience from Denmark and Switzerland does not suggest that negative deposit rates are clearly effective, however. In both countries, commercial lending rates rose once the central bank took such a step, as banks sought ways to pass on the higher cost to consumers.

"The maximum impact from an ECB rate cut would come with a negative deposit rate and liquidity-boosting measures," wrote Frederik Ducrozet, senior economist at CA-CIB. "However, it is a closer call than many think and there is no guarantee that negative rates alone would boost bank lending."

Analysts said further easing by the ECB would have only a marginal impact on the euro. The currency, which rose over 4 percent against the dollar last year, is down nearly 2 percent so far this month and was trading around $1.36 on Wednesday.

"The impact on the euro is largely priced in," said Christian Schulz, senior economist at Berenberg Bank.

"The euro has already come down from $1.40 to $1.37 or $1.36 and there's going to be an additional knee-jerk reaction on the day but that's probably it." (Polling by Siddharth Iyer and Kailash Bathija; Editing by Catherine Evans)