Thursday, September 26 14:28:16
The ECB will serve up another course of ultra-cheap cash to banks, possibly by year-end, through another long term refinancing operation as it battles to keep money market rates low, a Reuters poll found.
The ECB has already injected over a trillion euros through two LTROs, in December 2011 and February of last year, and 42 of 56 economists in a poll taken this week expect another one.
Sixteen economists said it would come by year-end, 15 said early in 2014, while a few others said in the first half.
ECB President Mario Draghi said on Monday the bank stood ready to offer more long-term loans to keep money market rates from rising to levels which could push inflation too low.
"If market rate expectations rise in a way that damages the growth outlook a bit, the ECB's response is likely to be to restart the LTRO programme along with enhanced communication," said Guillaume Menuet at Citi.
Central banks have taken to communicating forward guidance to steer markets and the ECB has said interest rates would remain low if inflation did - and it is not seen reaching the bank's two percent target ceiling until 2015 at least.
But the guidance from the U.S. Federal Reserve has been unclear, according to a Reuters poll taken after the Fed surprised markets last week by postponing a reduction in its massive $85 billion a month bond-buying programme.
Conflicting views from policymakers of when the wind-down will eventually come has left markets jittery. But a Reuters poll taken after the decision expected the Fed's delayed tapering to begin in December.
Long-held expectations for a reduction in Fed bond buying are what have been driving up market rates.
The latest Reuters poll showed economists were split on the ECB's ability to cap long-term borrowing rates in the bloc once the Fed does act, with 33 saying it would not be able to keep yields down and 23 voting it would.
Executive Board Member Benoit Coeure said last week the ECB wanted to ensure money market rates do not overreact.
A Reuters poll of bond strategists predicted yields on 10-year German paper would reach 2.30 percent in a year's time, around 60 basis points higher than current levels.
In a sign of normalisation, banks began repaying the first two long-term loans in December but the resulting fall in liquidity could add to upward pressure on money market rates.
Early repayment of those loans has cut excess liquidity to around 218 billion euros ($294 billion)- not far from the 200 billion level the ECB has said may be the point when market rates start edging up toward its main refinancing rate, currently at 0.5 percent.
Draghi has pledged to keep interest rates at their record low for an "extended period" and respondents to the poll were sure he would follow through.
Forty-two were very convinced and 23 were somewhat convinced. None said they were not convinced.
As in all Reuters polls taken this year, no move was seen in interest rates until the end of the forecast horizon, currently March 2015. Only five of 75 respondents saw a hike before then. None saw any move when the bank meets on Wednesday.
"Given huge output gaps, high unemployment rates and a slow recovery, inflation rates should stay low for a considerable period of time. This gives the ECB ample room to hold interest rates low," said Kristian Toedtmann at DekaBank.