ECB Said to Weigh Looser QE Rules as Brexit Depletes Asset Pool

Brexit Prompts Policy Talk From BOE, ECB
  • Some governors in favor of moving away from capital key
  • Bundesbank probably concerned character of QE would change

The European Central Bank is considering loosening the rules for its bond purchases to ensure enough debt is available to buy in the aftermath of the Brexit vote, according to euro-area officials familiar with the discussions.

Policy makers are concerned that the pool of securities eligible for quantitative easing has shrunk after investors piled into the region’s safest assets and pushed down yields on some sovereign debt too far to meet current criteria, said the people, who asked not to be identified because the matter is confidential. Some Governing Council members now favor changing the allocation of bond purchases away from the size of a nation’s economy toward one more in line with outstanding debt, one of the people said.

Such a move risks controversy because securities issued by highly leveraged governments such as Italy -- the world’s third-largest debtor after the U.S. and Japan -- would benefit. Questions over the legality of ECB bond-purchase programs have occupied some of the region’s highest courts recently because of opponents’ claims that operations conducted in the name of monetary policy might prop up profligate nations.

Bundesbank Concern

The Bundesbank would probably be concerned that the character of QE would be put into question if bond purchases deviated from the so-called capital key structure of purchases, one person said. Spokesmen at the ECB and the Bundesbank declined to comment on the prospect of a loosening of the rules for QE.

“It’s been a likely destination for some time and eventually they will have to do this,” said Richard Barwell, senior economist at BNP Paribas Investment Partners in London. “Brexit may have accelerated the discussion.”

The euro weakened 0.8 percent after the report and traded at $1.1073 at 6:52 p.m. Frankfurt time. Italian and Spanish bonds rose.

One irony is that Germany is contributing to the rethink at the ECB. Bonds maturing in the next 15 years are yielding less than zero after the U.K. unexpectedly voted to leave the EU on June 23, and benchmark securities due in seven years or less are ineligible for purchases under QE after investors hoovered them up amid market turmoil similar to that in the 2008-2009 financial crisis.

Present Rules

Under the guidance of the ECB, central banks in the euro area are currently spending 80 billion euros ($89 billion) a month, the vast majority on sovereign bonds, to drive up an inflation rate that hasn’t reached the institution’s goal of just under 2 percent for more than three years. Officials currently predict consumer-price growth will accelerate to 1.6 percent in 2018 from 0.2 percent this year.

Present rules stipulate that euro-area central banks can buy bonds sold by governments, agencies and European institutions in the secondary market that yield more than the ECB’s deposit rate, currently at minus 0.4 percent, respecting issue and issuer limits of as much as 33 percent. Purchases of covered bonds, asset-backed securities and corporate debt follow slightly different standards.

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