ECB UPDATE: More Flexibility But Not on QE Issuer Limit Rules

--Weidmann, Hansson Opposed to Changes in '33% Rule'

--Draghi, Governing Council, in Search of More 'Policy Space'

By Jack Duffy

     PARIS (MNI) - If European Central Bank President Mario Draghi hopes to

extend the ECB's E2.3 trillion bond purchase program next year by changing

issuer limit rules, he will find at least two influential members of the bank's

Governing Council against him.   

     Both Ardo Hansson, governor of Estonia's central bank, and Bundesbank

President Jens Weidmann said this week they would be opposed to any change in QE

limits that currently prohibit the ECB from buying more than 33% of bonds from

one issue or issuer

     Weidmann, in an interview with the German daily Boersen-Zeitung, said a

change in QE program parameters would have "considerable negative consequences."

     Hansson, in an interview with Bloomberg, said while some rules may be more

binding than others "to me, issue and issuer limit are more important than other

things we set as constraints in the past."

     Draghi, to be sure, has not publically argued for any change in issue or

issuer limits but has said he wants to see a "durable" increase in inflation

before scaling back stimulus. At their July meeting, ECB rate-setters agreed

that a "very substantial degree" of monetary accommodation was still needed for

the inflation rise to become durable.

     Eurozone headline inflation, at 1.3% in July, has risen as the economy has

strengthened but has been on a downward trend since reaching a high of 2.0% in

February. 

     The ECB's self-imposed 33% rule is widely expected to start biting next

year, with the central bank seen maxing out on German, Dutch, Portuguese and

Irish government bonds by sometime in the spring. This suggests that either the

QE "easing bias" -- the vow to ramp up bond purchases if necessary -- or the

issuer limits will have to change as the ECB sets its course for 2018. 

     Draghi, who set out a framework for why QE was necessary in his appearance

at the Federal Reserve's Jackson Hole, Wyoming symposium in 2014, will have an

opportunity on Friday at the same venue to tell markets how he expects it to

end. 

     While he may choose to withhold details ahead of a debate that is expected

to start at the Sep 7 Governing Council meeting in Frankfurt, ECB watchers

expect him to continue to argue for caution and flexibility in the withdrawal of

any growth-supporting measures.

     With markets on a knife-edge about the ECB's next moves, Governing Council

members agreed at their July 20 meeting that they needed "more policy space and

flexibility" to adjust monetary conditions going forward.

     Hansson underlined the point in his Bloomberg interview:

     "Maybe we want an easing bias, but we will deliver it in somewhat different

combination," he said. "We are not going to tie ourselves to a particular

instrument, but leave more flexibility to how we technically deliver that degree

of accommodation." 

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$X$$$,M$$EC$]