ECB to ease policy again in December via expanding QE: Reuters poll

By Sumanta Dey

(Reuters) - The European Central Bank will almost certainly ease monetary policy further next month, according to economists in a Reuters poll who thought that for now at least, an expansion or extension of bond purchases was the most likely option.

ECB President Mario Draghi signaled last month that the Governing Council would act as needed to ensure inflation, currently languishing at zero, rose to its target of near 2 percent in two years.

Reuters reported exclusively on Monday that a consensus was forming at the Bank to cut the deposit rate further, to weaken the euro and push inflation. Even Germany, which initially opposed QE, has so far not voiced any resistance.

Draghi's dovish message has raised the odds for more stimulus and economists polled this week gave a median 75 percent probability the ECB would act at the Dec. 3 meeting.

The likelihood is remarkably stable from a snap poll conducted soon after the October policy meeting, considering the euro has already weakened 5 percent since then on expectations the U.S. Federal Reserve would hike interest rates in December.

The central view among forecasters is that the ECB will expand or extend its quantitative easing program in December - or possibly do both - but for now at least, it will leave its deposit rate unchanged at -0.20 percent.

Euro money market traders polled by Reuters this week shared that view for December. [ECB/REFI]

"It (more easing) may not be very useful, but central bankers' speeches feed expectations," said Jean-Louis Mourier, economist at Aurel BGC in Paris.

"It seems the ECB is putting itself in a corner ... doing nothing in December could cost much (more) than implementing useless supplementary measures."

If the ECB does increase its bond purchases, economists predict it will bump up the size to 75 billion euros ($81 billion) a month from 60 billion now. And if it decides to extend the planned expiry date from September 2016, it's likely to be June 2017.

Since March, the ECB has bought about half a trillion euros of mostly sovereign bonds, hoping the stimulus would keep yields low and weaken the exchange rate, with the long-term goal of boosting inflation.

But inflation has barely risen - the highest it reached since the start of QE was just 0.3 percent in May - partly due to persistently low global oil prices but also weak demand.

Economic growth was a modest 0.4 percent in the second quarter, is expected to hold there in the third quarter as well, and will persist at that rate through the fourth quarter of 2016, according to the poll.

While inflation is expected to accelerate, it will likely average just 1.6 percent even as far out as 2017 - the ECB's forecast horizon.

Early signals from business surveys so far have painted a tepid outlook for the current quarter and also suggest that firms have resumed price-cutting to drum up new business.

Still, there are some economists who question what good an increase in QE or a further deposit rate cut would do even with little growth and no inflation.

"How much more impact could the ECB achieve with an increase of monthly QE buying by 20 billion euros?" asked Marius Daheim, economist at SEB.

"Much of what Draghi is doing verbally is about fine-tuning the euro exchange rate. Timing-wise, it would seem smart for the ECB to wait until the Federal Reserve decision on Dec. 16. Lift-off in U.S. policy rates would ease pressure on the ECB to deliver more stimulus."

A Reuters poll on Tuesday showed economists calling for a December rate hike in the United States are now more convinced after a robust employment report last week.

The wider median gave a 70 percent chance the Fed would raise rates next month for the first time in almost a decade, in step with financial market bets. [ECILT/US]

(Polling by Krishna Eluri and Deepti Govind; Editing by Ross Finley and Ruth Pitchford)

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