Euro Zone in Deflation Until Q4; 1-in-4 Chance of Greek Exit

The euro zone's bout of deflation will last for most of this year despite the European Central Bank's decision to buy government bonds, according to a Reuters poll that also gave a one-in-four chance of Greece leaving the currency area in 2015.

The findings from a survey of economists taken this week are likely to disappoint the ECB, especially just after it announced, after much debate, a quantitative easing programme worth 60 billion euros a month starting in March.

But a majority, 20 of 32, said that will not be enough to bring inflation back up to the ECB's target ceiling of 2 per cent from -0.6 per cent now, matching a record low.

Consumer prices will likely keep falling compared with last year until the fourth quarter, the poll showed, a sharp downgrade from last month, when economists forecast that would happen from January to March only.

For the full year, inflation is seen averaging -0.2 per cent, compared with 0.2 per cent in last month's poll.

If the poll predictions are correct, that would signal the longest stretch of falling prices in the monetary union since its inception in 1999 and would counter policymakers' claims the region would avoid deflation.

"More needs to be done in order to make QE effective," said Elwin De Groot, economist at Rabobank. "To strengthen the impact of QE it should go hand in hand with a further let-up in fiscal policy and a speeding-up of structural reforms."

The euro has weakened more than 6 per cent since January on hopes of additional stimulus from the ECB and a mid-year interest rate hike from the US Federal Reserve. But a sharp drop in global crude oil costs and weak demand has kept a lid on prices.

A private industry survey earlier this month showed euro zone firms cut prices at the fastest rate in five years in January to drum up new business.

But while economists predict QE is unlikely to boost inflation, they are optimistic the new cash will help banks increase lending to private businesses by the end of this year.

Lending to households and firms fell by 0.5 per cent in December - less than in previous months - but remains an area of concern for the ECB, which has lent trillions of euros to banks in the hope that it will filter through to the economy.

"Credit supply and demand conditions are improving. However, ongoing balance sheet reduction in the private sector is likely to continue to dampen credit demand," said Johannes Gareis, economist at Moody's Analytics.

Growth in the monetary union will likely average 1.1 per cent this year, and 1.6 per cent in 2016, roughly in line with the previous poll.

By contrast, the US and UK economies are expected to grow 3.2 per cent and 2.6 per cent in 2015.

One-in-four chance Greece exits

Deflation is not the only risk facing the currency bloc.

The new Greek government's plan to abandon its austerity programme will continue to pose challenges to policymakers.

Prime Minister Alexis Tsipras on Tuesday won a confidence vote on his plan to cancel the bailout programme and end years of austerity imposed by international lenders that has resulted in deep job cuts and widespread discontent.

Since entering office less than a month ago Tsipras has stopped privatisations of public firms and promised to reinstate pensions and get government workers back into jobs.

But Germany, the ECB and other creditor nations remain opposed to allowing any concessions for Greece, especially if Athens deviates from its reform agenda.

Economists in the latest poll gave just a 25 per cent chance of Greece leaving the euro zone this year. But that is the highest probability collected by Reuters polls - even those conducted during the depths of the debt crisis between 2011-2012.

Athens is set to run out of money soon and is seeking a bridge loan to help it stay afloat and avoid a default while negotiations with lenders go on.

"There are no legal procedures for a member country's exit from European Monetary Union. Greece cannot be forced to exit," said Marius Daheim, senior consultant at SEB.

"However, once having defaulted, Greece may chose to negotiate an exit agreement. This would incur strong losses for its creditors, but as these are mainly European taxpayers, the fallout on financial markets should be contained. Grexit is not going to be another Lehman-type event."