ECB policy seen steady as recovery gradually takes hold - Reuters poll
By Sumanta Dey
(Reuters) - Euro zone monetary policy is likely to remain steady well into the future as a more broad-based recovery takes hold while inflation has probably already fallen as low as it will go, a Reuters poll showed on Friday.
Still, calls for the European Central Bank to ease policy -either by cutting interest rates, already near or at zero, or by printing money - have intensified in recent months.
While no one expects any move at the ECB Governing Council's May meeting next week, roughly half of forecasters expect some form of stimulus in the future, be it a rate cut or outright buying of assets.
Their main concern is inflation, for which the ECB has set a target of just below 2 percent. It rose slightly in April, but at 0.7 percent it is low enough that a sudden crisis or downturn could bring about deflation, from which it may be very hard to escape.
The ECB has also expressed concern about the strong euro, which at $1.385 is keeping imported inflation capped. Most of those polled said that $1.40 is a danger level that would likely trigger a response from the central bank.
But business surveys in the region are showing a modest, broad economic recovery even if it hasn't yet made a dent on very high unemployment. The Markit PMIs covering the euro zone all showed growth in April for the first time since late 2007.
"At the moment the ECB is playing for time. It is quite confident that inflation will increase at least a bit over time," said Kristian Toedtmann, senior economist at DekaBank in Frankfurt.
It is clear that the ECB would prefer not to cut rates further if it isn't forced to and that its candid discussions about quantitative easing as a policy option aren't likely to lead to action any time soon.
"The ECB is really not inclined to use monetary policy instruments that are untested in the euro zone, and also politically not desirable. I think Draghi and his colleagues will be rather happy if they get through this situation without having to take strong measures."
While chances for outright quantitative easing from the ECB are low - the survey gave a median probability of just 28 percent - a majority said that if QE took place it would have to be after scheduled bank stress tests to avoid distorting the Asset Quality Review's conclusions, due later this year.
The ECB will also be reluctant to embark upon mass asset buying on the scale begun by the U.S. Federal Reserve and Bank of England half a decade ago, especially if inflation is moving gradually back towards target.
Forty of 52 economists in the poll conducted this week said euro zone inflation will not revisit the 0.5 percent recent trough carved in March or go any lower in the near future.
"In the absence of any concrete catalyst for further action, the ECB will need to continue sticking to words," wrote Christel Aranda-Hassel at Credit Suisse in a note.
"Even if the dovish talk is tested by an appreciating euro, the initial response would be more conventional policy action, meaning another rate cut and most likely a negative deposit rate rather than QE," Aranda-Hassel wrote.
Euro area banks will borrow 140 billion euros (115.08 billion pounds) at the ECB's regular refinancing operation next week, lower than the 172.6 billion they took up on Wednesday, according to a separate poll of money market dealers.
Banks are also expected to repay 6 billion euros of the ECB's three-year emergency loans in the week of May 12. On May 7 they will return 1.75 billion euros.
Excess liquidity - the money banks hold in excess of their daily operational needs - fell to below 100 billion euros this week, according to Reuters calculations.
While ECB President Mario Draghi has said the early repayments were a sign banks are in a better position to raise funds through the money market, the large bids for the ECB's cash in the refinancing operations suggest money markets are still not fully functional.
(Polling by Swati Chaturvedi and Sarmista Sen; Additional reporting by Ashrith Doddi; Editing by Ross Finley and Hugh Lawson)
