With unemployment stubbornly high and growth still bouncing along the bottom seven years after the financial crisis, the European Central Bank will need to more than double its €1.1 trillion bond-buying blitz launched earlier this year, said S&P.
The warning came as inflation fell back into negative territory for the first time in six months in September. Consumer price growth dipped to -0.1pc, confounding analyst expectations after being pushed lower by a near 9pc fall in energy prices. Core inflation – which strips out volatile elements such as energy prices – remained steady at 0.9pc.
It is the first time deflation has come back to stalk the single currency after ECB Mario Draghi fought a protracted battle inside the Bank to begin asset purchases to defeat the spectre of low growth in March.
The ECB is expected to carry out its €60bn-a-month asset purchases until at least September 2016, and has said it is willing to extend the programme in the wake of turmoil in financial markets and fears over China.
But S&P’s expectation that stimulus will continue into mid-2018 goes well beyond analyst predictions of a just a six-month extension. It would also more than double the current commitment to €2.4 trillion.
“Even in the best case, we believe inflation will still be well below the bank’s target of close to 2pc” said the rating’s agency.
“We wouldn’t be surprised if the bank announced as early as December this year that it intends to extend its QE program well beyond 2016, until mid-2018, for a total that could reach €2.4 trillion, twice what was initially committed.”
The stimulatory effects of euro-QE have been stymied in recent months by the rising value of the euro, note S&P. The single currency has appreciated against the dollar in the wake of market uncertainty of a rate hike in the US.
“At a time when foreign demand is weakening, as is the case today, a less competitive exchange rate is an additional hurdle for exporters,” said the report.
In further worrying signs for policymakers, unemployment is also failing to respond to the ECB’s accommodative measures. Joblessness was revised up to 11pc in August and remains far above the 8.8pc average seen in pre-crisis Europe between 1999 and 2007. Unemployment rose again in Cyprus, Finland, Portugal, and Europe’s second largest economy France, where it has reached an eye-watering 10.8pc.
Expectations for future inflation – a key gauge for central bankers – has also slipped back to its pre-quantitative easing levels, at just 1.5pc.
But the prospect of “perma-QE” is set to cause alarm in the eurozone’s largest economy – Germany.
The hawkish head of the German central bank, Jens Weidmann, urged his fellow policymakers this week to ignore the transitory effects of lower commodity prices when making decisions over more stimulus.
“Monetary policy should look through the energy price-induced inflation fluctuations, because they are temporary and they increase purchasing power and thereby strengthen the economy anyway,” he said.
However, S&P painted a picture of a fragile currency union exposed to a range of external shocks, from a US interest rate rise to a Chinese slowdown.
According to the report, should China’s economy average just 4.3pc growth over the next two years, the single currency would grind to a halt, with GDP being hit by 0.8pc.
Despite its protestations over looser monetary policy, Germany would be the most exposed, with the economy shrinking by 0.9pc, said the report.