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MNI SOURCES: ECB May Buy E20-30B Bonds/Month In Fresh QE
LONDON (MNI) - The European Central Bank is likely to announce fresh net
asset purchases of around E20 billion to E30 billion a month at its September
meeting, together with a cut in its deposit rate and a further dovish adjustment
to forward guidance, ECB sources told MNI.
Other measures, including tiering the deposit rate in order to alleviate
the impact of negative interest rates on banks, and possibly small adjustments
to the terms of existing targeted longer-term repurchasing agreements may also
be included in a package which some ECB officials said might fall short of
"It may not be as large as some expect - it may be E20-30 billion a month
in bonds within existing parameters, with an initial run of say six months," one
official told MNI.
Another said: "I don't think we'll end up using full fire power ... I think
we'll be sticking to the existing issuer limits of E30 billion per month."
The second official said there should be no initial need to adjust limits
on buying individual countries' bonds, although expanding the range of assets
that could be purchased might be an option in the future.
Fresh quantitative easing could begin with purchases at levels "similar to
when APP ended," according to a third official. The ECB was buying E15 billion
in bonds a month when it concluded its last QE programme last December.
The magnitude of the cut to be made to the deposit rate, currently at
-0.4%, has yet to be agreed.
"A rate cut remains a certainty, I'd guess 10 basis points, but it could go
to 20 - although this is probably not the most likely outcome," an official
Tiering, which would apply different rates to banks depending on the amount
they deposit with the ECB, is also a possibility.
"Tiering is appropriate if rates are cut, but not on its own just to offset
negative rates' downside risks for the banking sector," said the official.
Another source close to the ECB agreed: "My feeling is that ECB staff are
very keen on lowering the [deposit rate] and compensating for this a little bit
by tiering, mainly for communication purposes."
The support of Mario Draghi, whose term as ECB president concludes in
October, will be important to securing a package of measures, the source said.
"Will the Governing Council really vote against the President in his last
monetary policy meeting if he is in favour of such a package proposal?"
Another official agreed: "I would say a majority would still support the
package approach, even though a package makes it even more difficult to fulfil
expectations in my view. If it's a small package it's worse than taking things
step by step, with one measure followed by promising further steps if
There is little room to sweeten terms on cheap TLTRO loans to banks, the
first official said. While it might be possible to cut the headline rate by 5
basis points to 5 basis points over the ECB's refinancing rate, "I can't see us
cutting the refinancing rate into negative territory."
Changes to forward guidance, which currently states that the ECB expects
rates to remain at present levels or lower at least through the first half of
next year, seem very likely, the official said.
"Forward guidance will be amended and strengthened," the official said,
adding that its duration could be extended. There has also been discussion at
committee level about linking the guidance to achieving a certain inflation
rate, but consideration of that is ongoing.
Other officials also expected a move on guidance. "Once rates are below
zero [an additional cut] doesn't make much difference, but forward guidance
affects long-term rates, so this is the one to watch," one said.
Officials agreed that the economy was facing a period of low growth, with
the potential for a technical recession in Germany and the danger that weak
manufacturing could spill into services. But some sectors were holding up
reasonably well. The ECB's September macroeconomic projections are likely to be
little changed from June's, one official said.
"I think almost nobody thinks about a new crash around the corner - it's
more the spreading view that more and more external risk factors [may]
materialise now and press the European economy on a lower growth path," a source
close to the ECB said.
An ECB official said he could not comment on the sources' remarks to MNI.
--MNI London Bureau; +44 203 865 3829; email: firstname.lastname@example.org
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