ECB will almost certainly conduct QE in Jan or March: Reuters poll

[LONDON] The European Central Bank will almost certainly embark on a sovereign bond purchase programme, and possibly announce one as soon as next week, according to economists in a Reuters poll.

After exhausting almost every other policy tool - interest rates are rock-bottom, banks have been flooded with cheap cash and financial securities snapped up - buying government bonds is about the last option ECB President Mario Draghi has to prevent deflation from taking hold in the economy.

Eurozone inflation turned negative in December for the first time since 2009 following a steep drop in global crude oil prices and the poll showed it is likely to stagnate at near half the ECB's 2 per cent target ceiling until the end of 2016.

That helped swing over expectations to a near-certainty that the ECB prints money like its peers in the United States and Britain have done and the Bank of Japan is still doing.

There is now a 90 per cent chance the ECB conducts quantitative easing (QE), the poll of more than 50 economists taken this week showed. Through most of 2014, forecasters consistently gave only an even chance, at most.

Economists gave a median 70 per cent likelihood an announcement would come as early as next week while all but one respondent said the ECB will act in March if not this month.

"Delaying a decision further does not make any sense even considering the Greek elections. Rather the ECB will include some safeguard clauses for lower rated countries or exclude them from centralized purchases," said Karsten Junius, chief economist at Bank J Safra Sarasin.

Greece votes for a new government next week and opinion polls have predicted a win for the leftist Syriza party which says it will cancel austerity programmes and renegotiate the country's debt.

A showdown with international lenders over Greece's debt could plunge the monetary bloc into another crisis similar to the one four years ago.

While there is near unanimity the ECB will print money, which member countries' bonds it will buy, in what proportion and how much it is likely to spend is still unclear.

Forty-four of 53 economists said it would restrict QE in some way and the median consensus is for the ECB's balance sheet to expand by one trillion euros by the end of next year - a target set by Mr Draghi.

"The ECB will not announce a formal target (for QE), but will link the quantity of sovereign bonds to be bought to its balance sheet target," said Peter Vanden Houte, chief economist at ING Financial Markets.

Still, quantitative easing in the eurozone would come more than two years after the Bank of England shut its own programme and just as the United States gears up to raise interest rates for the first time in half a decade.

The prospect of outright money-printing by the ECB pushed the Swiss National Bank to scrap its three-year-old cap on the franc on Thursday, boosting the currency by up to 30 per cent against the euro.

Germany's staunch opposition to QE, which essentially finances national debt, has so far held the ECB back but the European Court of Justice endorsed the purchase of sovereign bonds on Wednesday, throwing open the doors for full fledged QE.

A majority of economists in the poll said buying sovereign bonds would help bring inflation back up to the ECB's target and it is unlikely the euro zone will slip into an extended period of falling prices.

A weakening euro could help bump up the cost of imports and make goods more expensive, although its near 13 per cent fall in 2014 did little to spur price rises.

While deflation is still not predicted, the median consensus in the poll shows prices will not rise at all on average from now until at least July.

Inflation is likely to average 0.2 per cent in 2015, followed by 1.2 per cent next year, while growth will also stay muted and rise just 0.3 per cent in the first and second quarters.

For the full year the economy is seen expanding 0.8 per cent, a shadow of the 2.6 per cent and 2.4 per cent growth rates seen for Britain and the US respectively Germany's economy, the biggest in the union, grew 1.5 per cent in 2014, its strongest rate in three years, early data showed on Thursday. Its economy is forecast to expand 0.3 per cent in the first quarter and average 1.4 per cent this year.

In France, the No 2 eurozone economy, growth is expected to average 0.8 per cent in 2015 and 1.3 per cent next year. Italy, now in recession, is projected to grow 0.4 per cent this year, the first rise since 2011, although numerous previous forecasts of recovery have proved to be wrong.

Spain's economy, one of the lone bright spots in the eurozone, is predicted to grow 1.9 per cent in 2015 - the fastest among major economies in the region, although its one-in-four jobless rate isn't likely to improve much this year or next.

REUTERS