(Reuters) - The European Central Bank is likely to cut its deposit rate again in March, according to a majority of economists in a Reuters poll who also said there was an even chance it will increase its monthly asset purchases.
A nearly 20 percent fall in oil prices and a punishing sell-off in global stock markets so far this year has put the focus back on concerns about global growth, particularly from the slowdown in emerging economies led by China.
That has dented expectations for further interest rate hikes by the U.S. Federal Reserve after it raised the fed funds rate last month and raised questions about the ECB’s ability to pull very low inflation back up toward its nearly 2 percent target.
ECB President Mario Draghi has said the central bank still has plenty of options left, suggesting it could act as early as March.
But economists were split on whether the ECB has any substantial firepower left other than increasing or extending its asset purchase program and further cuts to deposit rate. The euro is trading almost exactly where it was two months ago.
The latest Reuters poll put the probability of ECB easing monetary policy at 80 percent in the next six months, with 59 of 68 economists forecasting another deposit rate cut when the central bank meets in March.
Economists gave only a median 50 percent probability of an increase at the March meeting to the 60 billion euros the ECB is currently spending each month buying bonds.
“We do not expect ‘more of the same’, even if more than a 10 basis points cut on the deposit rate is unlikely. Mere extension would not be on par with ‘new circumstances’,” wrote analysts at Bank of America Merrill Lynch.
The central bank disappointed markets in December by not increasing its monthly spend, although German members of the Governing Council even opposed the more modest decision to extended the program’s planned duration while also trimming an already-negative deposit rate.
“The next press conference being two months away and the ECB’s disappointment in December might stop the market getting ahead of itself pricing in aggressive easing at this stage,” noted analysts at Barclays.
A separate Reuters poll showed the euro zone economy was expected to expand by 0.4 percent in each quarter until Q1 2017. While that may be a decent pace of growth by recent standards, it is still not enough to lower unemployment or lift inflation meaningfully. [ECILT/EU]
The ECB has been buying 60 billion euros a month worth of mostly sovereign bonds and currently expects to keep doing so until March 2017. The stimulus program has had some success but inflation remains close to zero, anchored there by falling oil and commodity prices.
Draghi has said the ECB has several policy tools left to use however, and a slight majority -- 31 of 59 -- of economists polled agreed with him. The remaining 28 did not.
“In principle a central bank has unlimited possibilities, but of course there are huge political constraints,” said Leon Corbelissen, chief economist at Robeco.
“In theory, the ECB could broaden markedly the range of eligible assets e.g., corporate bonds, credit, high yield, real estate, equities, FX ... (and) QE for the people also comes into view as a desperate measure of last resort.”
Those who did not agree said that monetary policy had already run its course and suggested as Draghi has done that governments would need to take action.
“The problem is weak demand in the euro zone,” said Christian Dreger, research director for international economics at DIW Berlin. “Any further stimulus will have to come from the fiscal side.”
Polling and analysis by Sarmista Sen and Vartika Sahu; Editing by Ross Finley and Catherine Evans