ECB in 'wait and see' mode; likely to extend QE later in year - Reuters poll

By Shrutee Sarkar and Sumanta Dey (Reuters) - The European Central Bank will leave policy unchanged this year, waiting to see if its new round of corporate bond buying and long-term loans to banks are successful in boosting inflation, a Reuters poll found. With expectations over the timing of a U.S. Federal Reserve interest rate hike acting as the main driver of the euro exchange rate, the ECB appears sidelined for now, with only an extension later this year to its asset purchases beyond March 2017 on the cards. In the meantime, the ECB has begun purchasing corporate bonds and is about to launch the next phase of its Targeted Long Term Refinancing Operations, essentially offering free cash to banks so long as they lend on some of the money. "The ECB will remain firmly in 'wait and see' mode for now until it can judge the effectiveness of measures announced in March, including corporate bond purchases and TLTROs," said Jennifer Mckeown at Capital Economics. "However, slowing growth while core inflation remains very weak is likely to see the case for additional policy support build. We expect another extension to the (asset purchase programme) to be announced in the second half of this year." A majority of economists in the survey taken this week, 21 of 34, expect the ECB to announce an extension to its 80 billion euros (£55 billion) a month stimulus programme beyond March 2017, by the end of this year. Five said the ECB would do nothing more, while four said the negative deposit rate would be cut even lower than the current -0.4 percent. Three said it would increase the size of the QE programme, while one said it would take other stimulus measures. But none of those measures, most of which have been in effect for over a year, have had any material impact on inflation, which is slightly negative, well below the ECB's target of close to but just below 2 percent. Inflation is forecast to average just 0.3 percent this year before picking up to 1.3 percent in 2017, the poll showed. GROWTH SLUGGISH AGAIN The immediate economic risk is whether or not Britain, Europe's second-largest economy, votes to remain part of the European Union in a June 23 referendum. If Britain votes to leave, that could trigger a hit to economic confidence in the rest of Europe and would heighten speculation on which country might be next. Opinion polls are suggesting the decision will be very close. After a temporary burst of 0.6 percent growth in the first quarter, the latest poll shows no change in the subdued outlook for euro zone growth, despite the ECB having already bought a trillion euros of sovereign debt and cut rates to record lows. The poll forecast a stable but lacklustre 0.4 percent quarter-on-quarter pace until the third quarter of 2017, which may not to be enough to generate the price pressures the ECB wants to see. Still, just under two-thirds of those who answered an extra question said they were somewhat confident the ECB's latest measures - corporate bond buying and new long-term loans - will boost lending to the real economy and help boost inflation. The other third said they were not confident or not confident at all. On Wednesday, the ECB started buying corporate bonds - an extension of its almost 2 trillion euros asset purchase programme - by snapping up the debt of some of Europe's best-known utility, insurance and telecom firms. But the euro climbed to a near four-week high as the ECB started buying those bonds, indicating there may be little benefits on inflation, if any, from a weaker currency. German benchmark Bund yields, however, sank to record lows. The corporate debt purchase programme is intended to give companies an incentive to invest in expansion, although a few large firms whose bonds were bought said they aim to use the extra cash to reduce their own debt burden instead. Demand for the free long-term loans, the first tranche of which will be auctioned later this month, is also likely to disappoint policymakers since most of what banks bid for will likely be used to repay loans from previous TLTROs. Money market traders polled this week predicted banks would borrow 451 billion euros, just under 30 billion more than the 423 billion euros that is maturing. [ECB/REFI] Euro zone private sector lending was 1.2 percent year-on-year in April, a fraction of the close to double digit rates before the financial crisis. Jens Oliver Niklasch, senior economist at LBBW, summarised the problem: "It's the demand side. The ECB will hardly succeed when there is little loan demand." (Polling by Vartika Sahu and Krishna Eluri; Editing by Ross Finley and)