ECB to Study QE Options That Don't Need Tweak to Rules

Updated on
  • Scenarios presented to Governing Council stick to ECB’s limits
  • Euro-area officials spoke on the condition of anonymity

Hatheway: Draghi Not Finding an Audience in Markets

The European Central Bank’s scenarios for its asset purchases after 2017 could be implemented without adjusting the parameters of the program, according to euro-area officials familiar with the matter.

The bond-buying options presented to policy makers this week involved combinations of monthly volumes and durations that all stick to existing limits, the people said, asking not to be named as the Governing Council’s deliberations are confidential. The people declined to identify the specifics of the scenarios, but said they are within market expectations. An ECB spokesman declined to comment.

Two and a half years and more than 2 trillion euros ($2.4 trillion) into quantitative easing, with economic growth broadening across the currency bloc, the ECB has started formal talks on how and when it might wind down monthly purchases. President Mario Draghi said on Thursday that the decisions are “many, complex” and involve risks, and the “bulk” of them would likely be taken in October.

ECB Monetary PolicySept. 7 decision
Main refinancing rate0 percent
Deposit rateminus 0.4 percent
Marginal rate0.25 percent
Asset-purchase target60 billion euros a month

The possibilities included -- but weren’t limited to - reducing the monthly purchase target to 40 billion euros or 20 billion euros, with extension options including 6 months or 9 months, Reuters reported, citing unidentified sources.

Draghi, speaking to reporters in Frankfurt on Thursday after the Governing Council meeting, said only that the discussions were about the length of the program and the size of the monthly flows. Finnish Governor Erkki Liikanen said on Friday that some elements may not be settled until December.

Fine Tuning

“Draghi said we will have a meeting in October where we will discuss these issues. It may be that some fine tuning will take place even after that, but the details and parameters will be known in good time before the program ends,” Liikanen said in Helsinki. “We need to hone the details to get them right.”

Jens Weidmann, president of Germany’s Bundesbank, said in Hamburg on Friday that one reason the Governing Council decided to wait for now is uncertainty over the path of inflation, which has been persistently low. Even so, he warned that officials should be careful “not to miss the right moment to act.”

Philip Lane, governor of Ireland’s central bank, told reporters in Dublin that discussions would go beyond just the asset-purchase program.

“The deeper question is what is the overall monetary stance, which has many elements,” he said on Friday. “We have the policy rate, the forward guidance, asset-purchase program and other measures which are not currently active but, as a matter of logic, they are part of what can be done.”

One challenge facing the ECB, commonly raised by economists, is that it could run out of debt to buy before it succeeds in putting consumer-price growth on a sustained path to its goal of just under 2 percent.

Its rules include buying no more than 33 percent of sovereign debt by issue or issuer, or 50 percent of supranational debt. The national central banks that carry out the asset purchases also stick roughly to the ECB’s capital key -- meaning they buy in proportion to the relative size of their economies -- though the rules allow temporary deviations.

The flexible approach on the capital key has so far led to more bonds being bought from nations with higher debt burdens -- especially Italy. France may also benefit as a growing shortage in countries including Germany, Portugal and Ireland curbs the ECB’s options for new purchases.

Italy’s 10-year bond yield climbed to 1.958 percent at 11:52 a.m. Frankfurt time, and the German equivalent rose to 0.310 percent. The euro was up 0.3 percent at $1.2062.

While the central bank’s limits are self-imposed, officials have said they accept that legal and institutional constraints would make changing them difficult. Some critics allege that the program already breaches a ban on monetary financing of governments, and the ECB is awaiting a ruling by the European Court of Justice after Germany’s top court asked for guidance.

“What these reports suggest is that the ECB is going for a two-step approach,” said Maxime Sbaihi, an economist at Bloomberg Intelligence in London. “That would leave time for the committees to work the options out.”

— With assistance by Brian Swint, Fergal O'Brien, Stephen Spratt, Kati Pohjanpalo, Carolynn Look, Piotr Skolimowski, and Dara Doyle

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