ECB set to ease next week

November 25, 2015 10:44 AM

The European Central Bank will ease policy next week in some way or another, according to economists polled by Reuters, many of whom say the bank cannot pull back now after signaling its intentions so clearly over the past month.

Speculation of further stimulus from the ECB has mounted ever since President Mario Draghi indicated in October that the Governing Council would act if needed to drive up inflation to its 2% target, a view echoed by several policymakers.

The ECB will next decide policy on Dec. 3, less than two weeks before a Federal Reserve meeting in which the U.S. central bank is widely expected to raise rates from zero for the first time in nearly a decade.

The likely outcome of both meetings has already been priced in by financial markets, which is why the euro has weakened over six% against the U.S. dollar since Draghi's comments last month.

Inflation, meanwhile, rose to 0.1% last month and a core measure is showing signs of strengthening over the past few months.

Still, a poll of over 50 economists taken this week showed forecasters predict an 80% probability of the ECB announcing further easing next Thursday - roughly the same result as the previous two polls.

"It (the ECB) cannot run the risk of disappointing markets, having raised expectations of action. Action in some form or other looks like a racing certainty; it's merely a question of the form it takes," said Ken Wattret at BNP Paribas in London.

Rhetoric from policymakers over the past few weeks has set expectations so high that there is a risk markets are disappointed no matter what the ECB does.

The consensus from the poll is that the ECB will cut the deposit rate further to -0.30$ from -0.20% now.

Forecasters also expect the ECB to increase the amount of bonds it buys each month to 75 billion euros from the current 60 billion euros, or extend its quantitative easing program beyond September 2016, or do both.

Reuters exclusively reported on Wednesday that ECB officials were considering options such as staggering charges on banks hoarding cash or to buy additional types of debt.

Not everyone, even within the ECB, agrees over the effectiveness of monetary policy though.

On Monday, Sabine Lautenschlaeger, a German member of the core team that sets ECB policy said ever-looser monetary policy had its limits and predicted a diminishing impact of future money printing.

She is not alone. Criticism has come from other quarters in Germany over the past couple of weeks, including from the finance ministry, a panel of economic advisers known as the "wisemen" and the head of the Bundesbank.

Indeed, so far the stimulus has had limited effect.

Inflation has dipped below zero a couple of times since last December owing to low energy prices and weak demand, economic growth has largely stuck to its lackluster pace while the unemployment rate has remained over 10%.

In contrast, unemployment in the United States and Britain has dipped to half that rate, close to a level that policymakers associate with full employment.

A majority, 36 of 46 economists in poll, said the ECB's monetary policy has been effective in improving lending to businesses - echoing Draghi's view.

While those claims are supported by the fact that euro zone business lending has stopped contracting, latest official data showed growth in loans to corporations slowed almost to a halt.

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