Chances ECB buys government bonds still 50-50 - Reuters Poll

By Rahul Karunakar (Reuters) - There is still only an even chance the European Central Bank will buy government bonds, according to a Reuters poll of economists taken after ECB President Mario Draghi warned last week of the need to bring inflation back to target "without delay." The poll, conducted after Draghi opened the door to more aggressive asset purchases in a strongly-worded speech on Friday, also concluded the ECB is likely to buy corporate bonds in addition to covered bonds and asset-backed securities. But the results once again suggest that the central bank will try to exhaust all other available options before embarking on a full-scale sovereign bond-buying programme, also known as quantitative easing (QE), which Germany firmly opposes. "Various complications mean that the ECB will want to keep QE in its back pocket as a last resort if all else fails," said Philip Shaw, chief economist at Investec. ECB Vice President Vitor Contancio said on Wednesday the central bank will be able to gauge in the first quarter of next year whether it needs to start buying sovereign bonds to stimulate the euro zone economy. That was in line with the latest Reuters poll findings, which showed the ECB is most likely to start sovereign debt QE in the first half of next year, if it does so. Data this week are expected to show inflation in the euro zone economy, which is growing at a very weak pace, has fallen back to 0.3 percent, dangerously low and well below the central bank's target of close to but just below 2 percent. In the hope of bringing that back up, the ECB wants to restore its balance sheet to its March 2012 level of around 3 trillion euros (2 trillion pounds), one trillion euros higher than it is now. While a majority of economists, 30 of 43, said the ECB's balance sheet expansion plan would be effective, they say it will take until the end of 2016 to build it back up that high. The balance sheet will be 200 billion euros bigger by March and 500 billion euros bigger than it is now by the end of next year, the Reuters poll showed. It is far from clear, however, if that will work. "The size of a central bank's balance sheet is far from decisive in setting the economy's course, as the Bank of Japan is finding," noted Stephen Lewis, chief economist at ADM Investor Services in London. The Bank of Japan, which has been conducting QE for most of a generation to fight deflation, announced late last month ahead of news of another recession that it will dramatically ramp up the pace of its already aggressive asset purchases. For its part, the ECB has begun buying covered bonds and asset-backed securities (ABS), effectively bundled loans, although they are in limited supply. A majority of economists expect the ECB also to buy corporate bonds, probably 150 billion euros of them. But most agree that it will be next to impossible for the ECB to expand its balance sheet by one trillion euros without purchasing government bonds, of which there are plenty. In June, the ECB launched Targeted Long-Term refinancing Operations (TLTROs), cheap cash offered to banks designed to boost bank lending to the private sector. The first tender, in September, drew only weak demand and net lending isn't rising. The Reuters poll predicted borrowing of only 150 billion euros at the second of two TLTRO tenders in December, which would bring the total amount to 232.6 billion euros, well short of the 400 billion made available. Despite that tepid demand, 31 of 38 economists expect these loans to be effective to some degree. "The TLTROs will help improve the pass-through of lower rates to the banking sector and consequently - with a delay - to the private sector. But this effect is slow and far from complete," said Elwin de Groot, senior market economist at Rabobank. (Polling and analysis by Hari Kishan and Rahul Karunakar; Editing by Ross Finley and Ruth Pitchford)