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LONDON (MNI) - The European Central Bank is likely to begin detailed
examination of the technicalities of embarking on a new round of quantitative
easing as soon as next month, an ECB source told MNI, cautioning together with
other ECB officials that fresh QE would only come after further economic
deterioration and not before September.
References to the possible use of QE by Mario Draghi at a press conference
following the ECB's last meeting, in Vilnius on June 6, were unanimously agreed
by members of the Governing Council, the first official told MNI. This implies
that the Bundesbank's Jens Weidmann, known as a critic of bond purchases via
Outright Monetary Transactions, was in favour. The official, in concert with
others, stressed also that while some downside risks have materialised, the
economy is not yet weak enough to warrant fresh asset purchases, for which some
governors have been arguing since March.
The potential technicalities of a return to net asset purchases could be
seriously discussed in July, the official said, arguing that only a minor
adjustment would be necessary to the 33% limit on the ECB's holdings of any
individual issuing country's sovereign bonds. Another ECB official said
consideration could be given to including asset-backed securities and covered
bonds in a new programme.
--ECONOMY WOULD NEED TO WORSEN
Some officials who spoke to MNI were surprised at how far Draghi went in
fresh comments about QE at the ECB's Sintra forum on June 18, in which he was
widely interpreted to refer to the possibility of changing the rules on issuer
limits. One said many eurosystem central bank governors had been caught off
guard and that the president risked inflating market expectations.
But other central bank officials said the ECB president's remarks were in
line with what he had said in Vilnius and one noted that it would be sensible to
consider any potential technical problems ahead of taking a decision on whether
to engage in more QE.
The ECB would need to see a further worsening in economic data to launch
more net asset purchases, another official said, pointing out that September
could be a potential month for doing this because it would coincide with fresh
economic forecasts. Delaying until October could be complicated by the fact that
this will be the month in which Draghi's term comes to an end, the source said.
For the meantime, weakness in eurozone manufacturing has not yet spread to
services and relatively strong employment and wages data still gives hope of a
rise in consumer price inflation, the first official said.
--DOUBTS OVER POWER OF RENEWED QE
In addition to the danger of court challenges to any changes to limits on
bond purchases, which was mentioned by some officials, the ECB has its doubts
over the efficacy of renewed QE. Even a return to high-volume QE might only
boost gross domestic product by 0.2%, according to ECB estimates cited by one
official who spoke to MNI earlier in 2019.
Even with expanded limits on purchases, renewed QE would present
challenges. The ECB might find itself buying German bonds when they are already
yielding below zero, an official noted. Alternatively, changes to the ECB's
capital key to allow it to buy more Italian bonds might send the wrong signal at
a time when the country is failing to comply with European Union restrictions on
deficit funding, the official said.
At the same time, the potential for cutting rates much lower, with the
deposit rate already at -0.4%, may be constrained by the impact of such a move
on bank profitability, two officials said, with one suggesting that rates could
be reduced, but not by much. A third said rate cuts might have to be accompanied
by tiering of the deposit rate, with different rates applied depending on the
amount of funds a bank parks with the ECB.
Another official said that even Governing Council members who have up until
now opposed tiering might vote in favour of it, if it was combined with other
measures of which they approved. Governing Council members from Germany and the
Netherlands, who have now given their approval to Draghi's QE comments, had in
March argued against the president when he had wanted to extend the bank's
forward guidance, which was then for rates to stay unchanged until at least the
end of 2019, into 2020, the official said. The ECB eventually made the change in
An ECB spokesman declined to comment to MNI on these matters.
--MNI London Bureau; +44 203 865 3829; email: email@example.com