(Reuters) - Bank lending to private euro zone businesses needs to grow at a 3 percent annual rate on a sustained basis in order to stir inflation, according a Reuters poll of economists who say that is not likely to happen.
In the latest monthly survey on European Central Bank policy taken Sept. 22-24, forecasters were also skeptical over whether the bank’s latest offer of hundreds of billions of cheap cash in exchange for lending will even work.
The consensus forecast is that banks will take up 175 billion euros at the next tender in December, which would take the total from two tenders to about 140 billion euros short of the 400 billion the ECB has put on offer.
That echoes views from money market traders polled earlier this week and suggests that bank lending, which has been contracting for years and at last measure fell by 1.6 percent on an annual basis, is weak because of insufficient demand, not supply.
“Things like this (TLTROs) are untried and untested and whilst in principle we can see it having some positive effect, it’s difficult to be confident about how well it is going to work,” said Philip Shaw, chief economist at Investec.
The ECB is not expected to announce any changes to policy at its meeting next week.
It surprised markets this month by cutting its already miniscule refinancing rate to just 5 basis points, as well increasing its charge for overnight deposits to 20 basis points.
But with lackluster demand for the ECB’s cash, despite the lower cost of borrowing coupled with risks of deflation and weak economic growth across the region, the central bank may eventually have to buy government debt.
Economists placed a 40 percent probability of the ECB buying sovereign bonds, the kind of stimulus programs undertaken by the Bank of England and U.S. Federal Reserve.
The difference is the BoE has long shut its money printing press while the Fed will likely end its stimulus next month.
Among its peers, only the Bank of Japan continues to buy asset-backed securities, government debt and exchange-traded funds, although inflation there is expected to stay below the central bank’s target well into the future.
In the euro zone, inflation rose to just 0.4 percent in August, slightly higher than July’s 0.3 percent but widespread unemployment in member countries is unlikely to spur demand for goods and services, preventing a swift rise in prices.
“Monetary policy is likely to have a limited impact on an economy with such serious structural problems as the euro zone,” said Stephen Lewis, economist at ADM Investor Services.
To arrest declining inflation and boost lending, the ECB earlier this month announced a program to buy asset-backed securities and covered bonds - a market considered fragmented and in its early stages in the euro zone.
The ECB will likely spend 300 billion euros in that program over two years, the poll showed.
The euro EUR= has weakened just over 2 percent since the start of September as markets geared up for policy action from the ECB. That weaker exchange rate should help make imports costlier, giving a slight boost to overall inflation.
Still, taken together, it means the ECB will eventually expand its balance sheet by only about half of the just over one trillion euros it lent out under the long-term refinancing operations in late 2012 and early 2013.
“The one message that the crisis has taught us in terms of non-standard measures is that liquidity does not necessarily lead to lending,” said Shaw at Investec.
“At the end of the day, you have to have demand for that credit for those policies to work. And the extent to which firms and households want to borrow is questionable.”
Polling by Sarbani Haldar; Additional reporting by Deepti Govind; Editing by Ross Finley and Susan Fenton