By Richa Rebello and Rahul Karunakar
BENGALURU (Reuters) - By the end of September, the European Central Bank will either cut its deposit rate or ease its forward guidance further by pledging to keep interest rates lower for longer, according to a majority of economists in a Reuters poll.
ECB President Mario Draghi in a speech last Tuesday called for "additional stimulus" in the absence of any improvement in weak growth and tepid inflation, which has languished below the central bank's target of close to 2% since 2013.
That brings the ECB in line with many of its major central bank peers who are already easing, or close to doing so.
But despite conviction among economists in the June 18-21 poll lining up with the ECB's plan for easing this year, the outlook for growth was lowered and inflation is still not expected to rise to the ECB's target.
That is despite years of record low interest rates and after the ECB allowed its balance sheet to soar with purchased assets, mostly government bonds, worth 2.6 trillion euros since 2015 under its quantitative easing programme. That ended in December.
"The ECB has the same problem that a number of other central banks have, notably the Bank of Japan, that they get diminishing returns from loosening policy, when you're already at or close to the effective lower bound," said Andrew Kenningham, chief Europe economist at Capital Economics.
"So clearly, that is a big problem. But there is really not much they can do about that; equally it would be a mistake for them to say, 'We are going to sit on our hands and do nothing, because we do not believe we have got any ammunition left'."
All but one of 45 economists who answered an extra question on the next policy measure expect the ECB to ease further in addition to extending already-announced long-term cheap loans to banks.
Over 80% of those economists said the ECB would either cut its deposit rate further and have a tiered system with conditions attached or tweak forward guidance by removing any reference to future interest rate hikes. The others expected the ECB to restart its quantitative easing programme (QE).
Of those who expect easing, about 80% forecast it to come before the end of September, including almost one-third predicting it to happen as early as next month.
While only a few respondents predicted a restart to the ECB's money printing, it is a complete U-turn in expectations: Economists in Reuters polls this year have repeatedly said it was not a mistake to shutter the QE programme in December.