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Without a radical change to economic policy in the 19-nation currency bloc, Europe’s feeble recovery risks remaining insufficient to deliver inflation in line with the ECB’s definition of price stability — a rate below but close to two percent. That’s what’s driving expectations Draghi will have to act again, even after he last month cut interest rates to record lows, expanded quantitative easing by a third and announced free long-term loans for banks.
“Economic growth and therewith wage growth in the euro area will remain weak for the foreseeable future,” said Fabian Fritzsche, an economist at Collineo Asset Management GmbH in Dortmund, Germany. “It is hard to image such a situation with inflation at or above the target.”
Draghi reiterated in Washington last week that it is “crucial” the very low inflation environment does not become entrenched in second-round effects on wage and price-setting. The inflation rate was zero last month, and economists see it climbing only slowly to average 1.7 percent in 2018. [...]
In the latest survey, two-thirds of the economists who predicted fresh action, and who provided a time frame, said new stimulus will come within the next five months. All but one said the ECB will extend QE past the current end-date of March 2017, and 36 percent said it’ll cut the deposit rate further below the present level of minus 0.4 percent. About a quarter said Draghi will expand monthly bond purchases above 80 billion euros ($90 billion) a month.
Economists saw little scope for much more in rate cuts though. Most agreed with the Governing Council’s view that the effective lower bound for the deposit rate will soon be reached. The analysts put that limit at minus 0.5 percent and 62 percent said if the ECB does reduce the rate again, the central bank will introduce an exemption system to mitigate the impact on the banking system. The benchmark rate, now at zero, can’t be cut any lower, the survey showed.
The ECB’s new plan to start buying non-bank corporate bonds as part of QE is expected to be fairly limited in size, at around 7.5 billion euros per month, according to the survey. That program is scheduled to start late this quarter. Only 11 percent of economists see equities as a potential next target.
As for even more extreme forms of stimulus, don’t bet on it for a while. Economists don’t expect that direct injections of cash into government coffers or the public’s pockets is a realistic policy option any time soon. Ninety-three percent said the ECB isn’t going to engage in what’s now being discussed under the term “helicopter money.”