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--No Decision On Reinvestment Likely Until December
--ECB Officials Divided Over Twist-Like Operation, Enhanced Guidance
LONDON (MNI) - The European Central Bank is likely to push back decisions
on how it will reinvest its maturing bonds from next week's Governing Council to
its December gathering as divisions within the executive board continue about
whether to concentrate more purchases on longer-dated debt and issue extended
forward guidance, ECB sources told MNI.
The ECB will also retain language stating that it "anticipates" ending its
bond purchases after December, given that, while only a seismic event would
derail the plan, it would be unwise to remove the conditionality at a time when
risks are mounting from Italy's budget plans, Brexit and global protectionism.
The imminent end of the asset purchase programme shifts the focus to
still-pending details of how the central bank will reinvest funds from
maturities within its existing stock of securities. Political sensitivities,
made more acute by fears of purchases that lower longer-term yields might be
seen to favour Italy at a time when it is flouting EU fiscal rules, mean a
decision on this matter is more likely at the ECB's December meeting, one ECB
source told MNI. Other sources agreed no decision was likely Oct. 25.
ECB officials are at pains to avoid comparison with the Fed's 2011
"Operation Twist" when describing the possibility of using the proceeds from
expiring short-term bond sales to buy longer-dated debt. Among the options
thought to be under consideration is drawing from the central bank's relatively
shallow stock of corporate securities to purchase more extended maturities, the
The ECB's corporate bonds have shorter maturities and will expire early, so
such transactions would automatically produce a Twist-like effect, but, in
contrast to the Fed's campaign, the intention would not to be to deliberately
flatten the long end of the yield curve, the official continued.
As MNI reported on Oct. 4, some within the ECB have called for a less rigid
interpretation of the central bank's capital key, which governs its bond buying,
to allow it more flexibility with regards to maturities. But others argue that
anything which looks like an attempt to target longer-term interest rates
exceeds its mandate. They also maintain that such a move would be less effective
than in the U.S., where companies rely more heavily on bond financing.
There is also disagreement on the imminent re-weighting of the capital key,
which is calculated according to member country's contributions to ECB capital.
Some officials have insisted that the reinvestment should be governed by the old
key, rather than the new version, which would slightly reduce the amount of
Italian bonds that can be bought.
"The new capital key will remain the guide moving forwards. I think we will
be honour and duty bound to observe that," another ECB official said. "As for
how that reinvestment will be carried out in the market by maturity, I'm not
sure technical work will be complete before Oct 25."
As Italy's budget showdown with the EU unsettles markets, speeches by
executive board members Peter Praet and Benoit Coeure calling for enhanced
forward guidance have also met with some resistance. The central bank currently
says it will hold interest rates at current levels at least "through the summer"
of 2019. Extended guidance would give investors some idea of how the bank might
react after what is widely expected to be a rate hike in the latter part of next
"More and more governors are saying that - we don't want to change rates
before the summer - but there could be a hint during the summer as to whether we
are set on the path of rate increases," the first ECB source said. "So if there
were to be a rate decision in September or October, the ECB Council would give
an idea in June."
Some executive board members feel such a move could constrain future policy
as ECB President Mario Draghi is due to step down at the end of October 2019.
Some have also said Draghi's exit date might influence rate hike timing,
although others deny this.
"I would say in the end that he will do everything not to be the one with
the first raise in interest rates, even if it's only a marginal adjustment to
the deposit facility rate, which is the obvious first step," a third ECB
An ECB spokesperson said that the central bank did not comment on what
--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com