By Shrutee Sarkar
BENGALURU (Reuters) – The European Central Bank may have missed its opportunity to raise interest rates before the next downturn, according to a Reuters poll that shows a majority of central bank policy watchers aren’t confident they will.
In a poll taken after the ECB said it would offer new long-term loans to banks later this year, nearly 90 percent of economists who answered an extra question also said it would not conduct any more asset purchases until at least the end of 2020.
That comes even though the ECB cut its 2019 growth forecasts to their lowest since polling began for the period, more than two years ago, according to the poll of about 100 economists. Inflation is not expected to pick up to the ECB’s target until at least 2022.
The consensus forecast now is that the ECB will not raise rates until even later next year compared with last month’s poll. More than 60 percent of economists who answered an extra question said they were not confident the central bank will raise them before the next economic downturn.
“Definitely, the cycle has already reached the highest point and we are now already in the slowdown phase,” said Peter Vanden Houte, chief euro zone economist at ING.
“So, the ECB probably did miss the bus in increasing rates. But the situation remains that from conventional tools, there is no scope at all to do something more if the economy goes into a more severe downturn.”
(GRAPHIC: Reuters Poll: Confidence ECB hikes before downturn – https://tmsnrt.rs/2UAVycj)
The survey was conducted against a backdrop of a slowing global economy, an ongoing U.S.-China trade conflict, and an impasse in Britain over leaving the European Union, and it found economists trimming growth forecasts.
“We think the euro zone is a shock away from a recession,” noted Luigi Speranza, chief global economist at BNP Paribas (PA:). “Against this background, we think monetary policy normalization is now over. The ECB is likely to leave rates on hold in 2019 and 2020. The debate is soon likely to shift to how the ECB could ease monetary conditions if needed.”
A series of weak economic reports have confirmed a euro zone growth slowdown, including just 0.2 percent growth in the fourth quarter, a recession in Italy, the euro zone’s third-largest economy, and a near-miss for Germany, its biggest.
Quarterly growth is set to nudge up to 0.3 percent this quarter, according to the poll, but average economic growth for 2019 was cut to 1.2 percent from 1.3 in the previous poll.
Inflation is forecast to slip this year to 1.4 percent. It is expected to average 1.5 percent next year and 1.7 percent in 2021.
But the median probability of a euro zone recession in the next year and the next two years slipped to 20 percent and 30 percent from 25 percent and 35 percent in the previous poll.
Some economists pointed to the ECB’s offer of new targeted long-term refinancing operations (TLTROs) as one reason for trimming their recession probabilities.
“With negative shocks that we have seen over the past few quarters … banks will be a little more cautious in extending credit. Now, that risk has been to some extent tackled by the ECB with the new TLTROs,” said Elwin de Groot, head of macro strategy at Rabobank.
“The TLTROs may help prevent further weakening of the economy at best, but that wouldn’t really boost growth.”
Several others said the TLTROs will be more effective by keeping liquidity stable in the euro zone.
“With the TLTROs, most probably, the ECB will prevent a credit tightening, and I think it will be quite successful, given the fact that a number of banks will just be replacing the previous TLTROs coming to maturity (with) the new ones,” ING’s Vanden Houte saod.