ECB, BoE to switch off money pumps

The European Central Bank and Bank of England have probably reached the end of their campaign to prime the banking system with hundreds of billions of euros and pounds, a Reuters poll showed on Wednesday. A further loosening in monetary policy by the two central banks is seen as unlikely after several years on a crisis footing.
Most economists said they would digest how their economies fare over the next couple of years before acting again. The 100 or so economists polled by Reuters since Monday were unanimous in their belief that neither central bank would change interest rates next week, and that there would be no major announcements on other policy measures.
The conclusion comes despite there being no sign the euro zone or UK will soon spring into a vigorous economic recovery, with little better than stagnation the best either can hope for in the coming quarters. "With euro area yet to emerge from recession and prospects of sharp fiscal tightening in several member states, the first hike in ECB rates seems a long way off," said Anders Matzen, chief analyst for the euro area at Nordea.
The majority of economists now expect the ECB's next move will be to hike interest rates from their record low 1.0 percent, although probably deep into next year at the earliest. In the March poll, a slim majority thought the central bank's next move would be to cut rates.
The ECB has pumped more than 1 trillion euros ($1.3 trillion) into the banking system in the form of cheap three-year loans since December. The BoE will have printed 325 billion pounds ($520 billion) of new money when its asset purchase scheme concludes.
Neither central bank now looks likely to flood the banking system with more money, the poll suggested, although a significant minority of economists - 24 out of 54 - thought the BoE had further to go with its quantitative easing programme. "With the euro area economy remaining very weak, the UK's recovery continues to look vulnerable," said Victoria Cadman, economist at Investec in London.
Cadman is in that minority, looking for a further 50 billion pounds, which would take the BoE's total asset purchases to 375 billion pounds. A handful of forecasters were looking for even more, ranging from 400 to 500 billion pounds. The latest business surveys suggest the euro zone economy might be taking a turn for the worse, after looking like it was emerging from a slump at the start of the year.
"The euro area economy is unlikely to overcome the current recession (or) stagnation unless economic growth in the rest of the world picks up significantly, or governments reduce the degree of fiscal austerity," said Silke Tober, economist at German economic research institute IMK. The sheer scale of the ECB's lending to banks has made some of its more conservative board members uneasy.
Economists reckon the ECB will persist with its policy of giving banks whatever amount they apply for in its regular one-week and one-month loan operations for at least a year or two, even if they are likely done with huge cash injections. "Weaning banks off the generous support will be an important part of the ECB's exit strategy over the next three years," said Christian Schulz, economist at Berenberg Bank. "However, the sector will need to rely on the central bank's emergency support for a while, with as little stigma attached as possible."
He said a quick withdrawal of this support could endanger the stability of the banking system. Britain's economy seems to be faring a little better than those of its euro zone peers, and most economists think a recession will be avoided despite news it contracted by a steeper-than-expected 0.3 percent in the fourth quarter.
Still, despite early signs of optimism about Britain's economy this year, an air of caution prevailed in economists' forecasts. "We suspect that activity will be erratic and muted overall through the first half of 2012 at least, and then only pick up gradually in the second half," said Howard Archer, chief UK and European economist at IHS Global Insight. A further round of limited asset purchases is more likely than not, he said, leaning towards an extra 25 billion pounds expansion of the quantitative easing programme in May.