LONDON (Reuters) - The European Central Bank will not embark on a programme of outright asset purchases to revive a sputtering recovery, a Reuters poll found on Tuesday, suggesting German-led opposition will succeed.
Under its mandate, the ECB is not allowed to directly finance euro zone states, and any move to do so through buying bonds of a particular country would face fierce opposition, in particular from Germany, Europe’s largest economy.
“We suspect quantitative easing will prove to be too controversial a policy within the Governing Council to get adopted,” said Howard Archer, chief European economist at consultancy IHS Global Insight.
“There is a strong faction within the Governing Council that is very reluctant to do QE, especially the German contingent.”
With interest rates near zero, earlier this month the Organisation for Economic Co-operation and Development urged the central bank to consider QE and the ECB’s vice president, Vitor Constancio, said last week the possibility of asset buying had been discussed.
Unlike central banks in the United States, Britain and Japan, the ECB does not buy bonds outright but instead uses them as collateral against loans, effectively taking them off the market or sterilising them.
A vast majority of economists - 47 of 59 - surveyed by Reuters this week said the ECB would not stop sterilising any bonds it decides to buy for its own portfolio. Sterilisation means offsetting purchases with sales to keep the transaction neutral. Not sterlising would open the door to quantitative easing (QE).
Another way of boosting liquidity would be for the ECB to reduce the amount it demands banks hold in reserve, a move it made in late 2011 when it halved the requirement to 1 percent and freed up about 100 billion euros.
But less than a quarter of economists polled, 11 of 49, said the ECB would do so again in the next six months.
Instead the poll suggested the ECB will conduct another long-term refinancing operation (LTRO), which gives banks access to cheap cash, early next year, said over two thirds of respondents in a separate Reuters poll last week. <ECILT/EU>
To boost liquidity the ECB injected over a trillion euros into money markets through two long-term loans, one in late 2011 and another in early 2012. But since the start of this year banks have repaid over a third of that cash early.
Those early repayments have reduced the spare money floating around and excess liquidity, cash beyond what banks and lenders need to cover their day-to-day operations, is now below levels seen before the ECB’s first LTRO, according to Reuters calculations.
After escaping from its longest ever recession earlier this year, the euro zone is struggling to gain traction, with great disparity in performance across the bloc. Euro zone inflation plummeted to just 0.7 percent in October, well below target.
The ECB surprised markets by cutting its main refinancing rate to a record low of 0.25 percent at it November meeting. Only one of the 68 economists polled expects another reduction when the Governing Council meets on December 5.
Medians in the poll do not foresee any change in the refi rate until at least July 2015, the end of the forecast horizon.
Similarly, economists do not expect any cut in the deposit rate, currently at zero. There are a handful of economists expecting it go below zero - a move that would effectively mean the ECB is charging banks to park money with it.
“The ECB will probably need more evidence of an inflation threat, which is unlikely to be forthcoming, if it is to push the deposit rate into negative territory,” said Michael Schubert, economist at Commerzbank.
But contrary to what some analysts have said, the poll found if the ECB were to cut the deposit rate it would not cause much disruption to the banking system.
“A very small negative rate will probably have little impact, but could be used to show the ECB ‘walks the talk’,” said Elwin de Groot, senior euro zone strategist at Rabobank.
Polling by Anu Bararia and Diptarka Roy Editing by Jeremy Gaunt