New ECB long-term loans not likely to revive euro zone lending

BANGALORE Tue Jun 17, 2014 11:02am EDT

European Central Bank (ECB) President Mario Draghi addresses a news conference following the ECB Governing Council meeting in Brussels May 8, 2014.  REUTERS/Francois Lenoir

European Central Bank (ECB) President Mario Draghi addresses a news conference following the ECB Governing Council meeting in Brussels May 8, 2014.

Credit: Reuters/Francois Lenoir

BANGALORE (Reuters) - The European Central Bank's latest offers for long-term cash won't revive lending in the region despite expectations for strong demand, a Reuters poll showed on Tuesday.

ECB President Mario Draghi announced several new policies this month, including cutting interest rates to record lows and offering a new series of long-term loans known as Targeted Long-Term Refinancing Operations (TLTROs).

But even with the new measures, economists saw a one-in-five chance of the euro zone slipping into deflation in the coming year, up from the 15 percent likelihood they predicted in a poll three months ago.

"On themselves, we don't expect the ECB measures to work miracles. They only tackle any potential liquidity shortages, but they don't provide capital relief for banks," said Elwin de Groot, economist at Rabobank.

All but six of the 36 economists who answered an extra question said they expected banks to borrow at least half the roughly 400 billion euros the ECB is offering, in the hope of encouraging more lending.

But a slim majority, 21 of 38 economists, do not expect that to boost lending in a meaningful way, suggesting the ECB needs to look beyond these measures to push up inflation.

On Monday, a further slowdown in euro zone inflation was confirmed - just 0.5 percent in May on the year - keeping them in the 'danger zone' of below 1 percent, half the ECB's mandate.

And inflation is not expected to rise above that danger zone at least until next year, according to the poll.

The ECB's own staff project consumer prices to rise just 0.7 percent in 2014 and 1.1 percent in 2015. It is projected to rise just 1.4 percent in 2016 - still below its target of below but close to 2 percent.

Although three euro zone countries - Greece, Portugal and Cyprus - are already seeing prices fall, ECB officials repeatedly have said there is no risk of this spreading to the entire region.

The poll respondents were unconvinced, however.

"On several dimensions, the euro zone economy is doing worse than Japan did in the 1990s ... which means that, despite recent ECB action, the risk of mild Japan-style deflation has not disappeared yet," wrote Martin van Vliet, senior economist at ING Financial Markets, in a note.

Another concern for the ECB is feeble economic growth, which dipped to a quarterly rate of 0.2 percent in the first three months of the year, half the expected pace.

Quarter-on-quarter economic growth is expected to run between 0.3 to 0.4 percent for the rest of the year.

(Polling and analysis by Swati Chaturvedi and Siddharth Iyer; Editing by Hugh Lawson)

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