March 3, 2016 / 12:13 PM / in 2 years

More ECB QE and another deposit rate cut likely on March 10

(Reuters) - The likelihood of the European Central Bank increasing its bond purchase program next week is growing, in addition to a near-certain view among economists that the central bank will cut its negative deposit rate further, a Reuters poll found.

The latest survey, taken this week, showed there was a 60 percent chance of the central bank announcing such a move at its March 10 meeting, up from the 50 percent median in surveys taken in January and February.

If the ECB does expand its purchases of mostly government bonds, currently at 60 billion euros a month, it is expected to do so only by an extra 10 billion. Even the most aggressive forecast was for a total 90 billion euros a month.

“The ECB failed to live up to its own hype in December, but we doubt that it will be prepared to disappoint markets again, not least because of the impact that this could have on the euro exchange rate,” said Jennifer McKeown at Capital Economics.

The euro EUR= hit a one-month low against the dollar earlier this week on expectations of more stimulus from the ECB. While the central bank says it doesn't target the exchange rate, a potential boost to exports from a cheaper currency is one of the few ways it can attempt to stimulate a flagging economy.

After stoking expectations of more stimulus, the central bank disappointed at the end of last year by doing what markets saw as the bare minimum - cutting its deposit rate and announcing a six-month extension to its QE program.

ECB President Mario Draghi hinted on Tuesday that the bank could add more stimulus this month in light of the deteriorating inflation outlook. Expectations in financial markets are high that he will deliver this time.

A majority of economists, 61 of 65, also expect the ECB to snip at least another 10 basis points off its negative deposit rate, taking it down to -0.4 percent, with 14 of them forecasting a 20 basis-point cut. Only four forecast no change in the deposit rate.

Purchasing managers’ surveys for February published on Thursday showed private sector growth in the euro zone slipped to its weakest in just over a year, with waning price pressures.

After spending roughly half of its planned 1.5 trillion euros of bond purchases, euro zone inflation is still far from the ECB’s target of close to but just below 2 percent. It fell back to -0.2 percent in February.

Most respondents in the Reuters poll also said the ECB would at some point modify its stimulus program in other ways, including expanding the scope of assets it buys under the plan to include corporate bonds, for example.

However, many remain skeptical over what more stimulus would achieve.

“Further monetary stimulus may not boost growth because banks may opt to park their money at the ECB,” said Tomas Holinka, economist at Moody’s Analytics. “Ballooning bank deposits and reserves at the central bank is a sign of a broken transmission mechanism.”

Additional reporting by Krishna Eluri; Editing by Ross Finley and Hugh Lawson; Polling by Sarmista Sen and Vartika Sahu

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