Poll-One in three chance ECB will launch asset purchases

By Sumanta Dey

(Reuters) - The chances of the European Central Bank launching an asset purchase programme have risen to one in three, according to a Reuters poll, in which a slim majority of economists see inflation picking up before that is necessary.

ECB President Mario Draghi announced a raft of measures this month to counter the threat of deflation, including cutting the deposit rate below zero and offering more long-term loans aimed at boosting bank lending to businesses.

These were aimed in part at curbing the euro's rise, which is pushing down imported inflation and crimping exports. But the currency has since recovered to near levels seen at the start of the month, highlighting the ECB's limited firepower.

Still, 27 of 53 ECB watchers polled this week say the central bank has probably done enough for now. Many among those who disagree say a quantitative easing programme is required for any lasting impact on the currency and inflation.

Whether the ECB will opt for an asset purchase programme to buy sovereign debt, like the U.S. Federal Reserve, Bank of England and Bank of Japan, is still unclear.

The latest poll gives only a three-in-chance of the ECB launching a full-fledged asset purchase programme in the next 12 months. However, that is up from around a 25 percent chance seen in a similar poll a month ago.

Given that Draghi has clearly signalled that rates won't fall any further and are likely to remain at record lows for some time, economists were unanimous in expecting no further change at the ECB's next meeting on July 3.

But waiting for an eventual rise in the U.S. dollar against the euro - and any boost to commercial bank lending from the ECB's long-term loans to them - may not be enough to bring inflation, at 0.5 percent, back up to the 2 percent ceiling.

"The targeted long-term refinancing operations are going to have only a modest impact on growth and inflation," said Mark Wall, chief European economist at Deutsche Bank.

"We continue to believe they will have to move up a gear and engage in purchasing private assets in the form of quantitative easing - most likely asset-backed securities (ABS) purchases."

But the main challenge is there isn't a proper ABS market in Europe that the ECB can buy from - it needs to be developed.

Euro zone inflation fell to 0.5 percent in May, well into what the ECB calls the danger zone below 1 percent. It has been in there since October.

So far, ECB policymakers have placed a low risk of the euro zone entering deflation, a vicious cycle of falling prices which pushes consumers to postpone spending, which in turn sends prices lower.

Greece and Portugal are already deflating. In Spain, the euro zone's fourth-largest economy, prices have stopped rising.

The strong euro, which is partly a result of foreign purchases of euro zone assets despite a lacklustre economy, is preventing inflation from rising.

That leaves the ECB in a very difficult spot.

"There are no effective measures the ECB could take. It is incorrect to suppose that a central bank can always generate inflation, even when interest rates are at the zero lower bound," said Stephen Lewis, economist at Monument Securities.

Below are a selection of analysts' comments:

ELWIN DE GROOT, RABOBANK

"We believe that inflation will gradually return to the ECB's stated goal of slightly under 2 percent over the course of 2017. Also, we forecast inflation to pick up in the final quarter of 2014."

"As such, we believe further measures are not necessary. However, if inflation has not picked up by the end of this year, the ECB may still come under significant pressure to do more."

JENNIFER MCKEOWN, CAPITAL ECONOMICS

"The best way to boost the economy and inflation would probably be to reduce the euro exchange rate. Given the quantities available, government bond purchases would stand the best chance of achieving this aim."

"The June decision to stop sterilising bond purchases made under the SMP means that the ECB is already implementing small scale quantitative easing. We would put the chance of bigger government bond purchases over the next 12 months at about 70 percent."

JENS-OLIVER NIKLASCH, LBBW

"The ECB already did too much. We do not expect deflation. If we are wrong, the ECB can buy government bonds. However, every measure to bring up inflation comes at the risk of fostering bubbles in the Euro core."

(Polling by Swati Chaturvedi and Siddharth Iyer; Editing by Ross Finley and Susan Fenton)