ECB to extend timeframe, loosen restrictions on bond purchases
The European Central Bank, faced with a further slowdown in euro zone growth after Britain's vote to leave the European Union, will soon be forced to extend and expand the scope of its asset purchase program, a poll of economists showed. Apart from purchasing 80 billion euros a month of bonds beyond March 2017, economists said the ECB is likely to abandon an earlier self-imposed restriction and begin buying bonds with negative yields below the ECB's -0.40 percent deposit rate.
It could also raise the limit on how much it can buy of each bond issue that is not protected by collective action clauses, according to the poll, which foresees no further interest rate cuts or increases to monthly asset purchases.
The ECB is not expected to make any changes to policy at its meeting on Thursday. The findings of the first poll since Britain's shock June 23 vote to leave the EU coincide with worries that the euro zone's largest economies are losing momentum just when the ECB's powers to avert another downturn appear limited. With swathes of the existing stock of government bonds in the euro zone now yielding less than zero -- forcing creditors to pay the borrower a yield for the privilege of lending -- the ECB has a limited amount of securities it can currently buy.
So far there has been scant evidence that super-low yields, and now negative yields, are doing anything to boost almost non-existent euro zone inflation, which the ECB targets at just under 2 percent. Given the ECB has only just boosted the size of its monthly purchases by 20 billion euros and included corporate bonds in the mix, pushing yields lower will be tough, and might not help.
"The fall in (German) Bund yields over the past quarter will make it increasingly difficult to expand the QE program and stick to the rule of not buying bonds with a yield lower than the deposit rate," wrote Karen Ward, economist at HSBC. "Our best guess is that these changes are made in September alongside an expansion of the QE program ( for another six months) although the Brexit vote may increase the (Governing) sense of urgency."
The Bank of England kept policy unchanged last week at its first meeting since the Brexit vote but made clear that rate cuts and further easing are on the way, probably in August.
After an acceleration in economic growth at the start of the year, momentum was fading before Britons voted to leave the EU on June 23, and is now expected to weaken even more.
But while calls for the ECB to ease further have grown louder in recent weeks, it is unclear whether more monetary easing will help, especially in the absence of fiscal stimulus.
Almost a third of 31 respondents who answered an extra question said they were less convinced of the ECB's
Council's ability to influence economic performance and inflation now compared with the start of the year. The consensus for euro zone GDP growth next year was slashed in the latest poll to 1.3 percent from 1.6 percent earlier, the lowest median since polling for 2017 started a year ago. That is weaker than the International Monetary Fund's latest 2017 outlook which lowered euro zone growth estimate by 0.2 percentage points to 1.4 percent.
Economists also cut their growth estimate for France to 1.2 percent for 2017 from 1.5 percent three months ago. Italy's was chopped to 0.8 percent from 1.2 percent. Euro zone quarterly growth from now through Q2 2017 was trimmed by 0.1 percentage point to 0.3 percent in the latest Reuters poll.
"The euro zone is late in the current economic cycle, and political uncertainty could push the economy into recession. But my base case is a slowdown next year, not recession," said Claus Vistesen, economist at Pantheon Macroeconomics. The poll gave a median 20 percent likelihood of recession in the coming year, much lower than the 60 percent analysts in a similar survey forecast for Britain. Despite all of the aggressive policy moves so far, the very subdued inflation outlook hasn't budged. Inflation, which rose 0.1 percent in June after falling or remaining stable for four consecutive months, is not expected to climb to the ECB's target until at least the end of 2017.