* ECB to ease policy in June, cut refi, deposit rate
* Deposit rate cut with targeted LTRO for business could
* Policy easing to have marginal impact on euro
By Sumanta Dey
BANGALORE, May 28 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
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
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