There is a one-in-three chance the European Central Bank will embark on an asset purchase program in 2015, prompted by rising risks of deflation and no signs of any vigorous economic recovery, a Reuters poll found.
So far the central bank has resisted such a move, which would involve buying sovereign bonds or asset-backed securities, providing instead another round of temporary access to cheap cash for banks, targeted at increasing lending.
But with inflation falling further, growth grinding to a halt in some of its major economies, and analysts reckoning there is little hope the cash bonanza for banks later this year will help stoke real demand, the ECB has few policy options left.
In a Reuters poll conducted Aug 7-12, economists gave a 15 percent chance the ECB will undertake quantitative easing this year. But the central bank is in the midst of conducting an asset quality review across euro zone banks, and most say it would not make sense to start before that is finished.
The probability of an ECB asset purchase program getting started then rises to about one in three for next year.
"Recent signs the euro zone recovery is faltering have further intensified deflation risks, implying that bolder monetary policy support is warranted," said Jennifer McKeown, economist at Capital Economics.
In the meantime, euro zone growth outlook has dimmed, with gross domestic product expected to expand 0.3 percent between October to March, down from 0.4 percent earlier, according to the Reuters poll.
The latest growth predictions were dragged lower by the possibility of no growth at all in France and a new recession in Italy, the euro zone's second and third largest economies.
Preliminary estimates on Friday are likely to show German economic growth stalled in the second quarter, which would make it the first quarter in a year and a half of no growth.
McKeown expects the ECB to implement quantitative easing towards the end of this year or early 2015, although she said it might wait to judge the effects of its Targeted Long-term Refinancing Operations (TLTROs) before doing more.
QE CHANCES STEADY EVEN AS INFLATION DIVES
Reuters has polled economists on the chances of the ECB conducting QE several times over the past year. Each time, the chances have remained around one-in-five or one-in-three.
But over the course of that period, inflation, which the ECB targets at 2 percent, has steadily dropped.
It has halved from around 0.9 percent in November, the first time such a question was asked, to 0.4 percent in the latest survey and less than half of what the ECB considers the start of its 'danger zone'.
"The euro area is one major shock away from deflation," said Holger Sandte, economist at Nordea.
Sanctions against Russia, a major trade partner of the euro zone, has also heightened economic risks for the bloc. Countries that export goods to Russia have to now deal with an overhang of supplies and inventory, which will likely depress prices and growth further.
Euro zone GDP is expected to average just 1.4 percent next year, less than half the growth rate predicted for the United States and over a percentage point lower than that of the UK. Policymakers in both countries are looking at when to raise interest rates.[ECILT/US] [ECILT/GB]
BUT STILL OPTIMISTIC ON INFLATION
Despite poor growth prospects, stock markets across the euro zone are near record highs even as bond yields have plummeted to or are close to all-time lows.
The lack of growth prospects haven't dented economists' optimism about inflation eventually picking up, either.
In the sample of almost 60 respondents in the latest poll, not a single participant pencilled in a negative forecast for price rises throughout the poll horizon.
Inflation is expected to average 0.7 percent in the last three months of this year then rise slightly to 0.8 percent between January to March.
While that is a downgrade from the poll last month, chances of weaker inflation are very high, with almost all but one economist who answered an extra question saying there were downside risks to their forecasts.
The strength of the euro, which keeps a lid on import prices, hasn't helped.
Although the single currency has slipped recently, the fall is mostly due to a rising U.S. dollar, spurred by better growth and rising bond yields in the world's largest economy.
A Reuters poll of currency strategists last week showed the euro will likely fall to $1.30 in six months and further to $1.28 in a year from $1.33 on Wednesday.
(Polling by Deepti Govind and Diptarka Roy Editing by Jeremy Gaunt)