MNI SOURCES: ECB QE Limits Unlikely To Be Hit For About A Year

--How ECB Handles Issuer Limits Firmly For Lagarde's Inbox

     LONDON (MNI) - The European Central Bank's relaunched quantitative easing

programme can run for many months and potentially be stretched to around a year

under current issuer limits, but Christine Lagarde, the incoming President,

faces a deeply divided council from day one on how to fashion future monetary

policy, well-placed Eurosystem sources told MNI.

     The ECB made no reference to self-imposed rules limiting it to holding no

more than 33% of any single country's bonds when it announced announced on Sep

12 that it would resume net asset purchases at a rate of E20 billion a month

from Nov 1 and carry on until shortly before it starts raising rates. 

     Some ECB officials told MNI the purchases could also target corporate

bonds, covered bonds, asset-backed securities and debt issued by the European

Investment Bank, but several acknowledged that the issuer limits would have to

be adjusted before too long.

     "The price of building a huge package was not to touch limits, and just

pretend they do not exist. That's for the next president," one Eurosystem source

said "It's not infinite ... There are no strict limits, but stretching the

criteria will get more and more unacceptable to some."

     A second official expected purchases to run at E20 billion per month for

"at least 12 months."

     The limited volumes and pace "suggest we won't be forced to change issuer

limits, rules nor tools," the same source added, while a third official said

only that the package "should take us through to the end of the year."

     "There is a little bit more flexibility than markets are allowing for," the

third source added.

     --LARGARDE'S INHERITANCE

     But incoming ECB President Christine Lagarde may face a difficult task

dealing with a deeply split Governing Council, after central bankers including

the French, Germans and Dutch resisted different aspects of September's easing

package.

     "What was most important, most noticeable," the first source noted, "was

such huge disagreement among the Executive Board members."

     Whether Lagarde can overcome such division when she assumes her new role in

November is, the source said, "an interesting question. Who can tell?"

     The German and Austrian central banks objected to a resumption of QE, and

would now like to allow the programme to end when it runs out of bonds to buy,

without adjusting issuer limits, said the third official, while the Netherlands'

Klaas Knot saw the broader package of measures as disproportionate. French

central bankers were eager for outgoing President Mario Draghi to put more

pressure on governments to take fiscal measures.

     While Germany's Jens Weidmann objected, like Austria's central bank, to a

resumption of QE, and would like to allow the programme to end when it runs out

of bonds to buy, without adjusting issuer limits, the Netherlands' Klaas Knot

saw the broader package of measures as disproportionate, said the third

official. French central bankers were eager for outgoing President Mario Draghi

to put more pressure on governments to take fiscal measures.

     The message from the dissenters "is really meant for Lagarde and their

message is that this has to be 'OK - this is final. Next time we have to take a

different approach'," said the third official added.

     But other ECB sources said they thought German and French Governing Council

members would eventually make their peace with the latest monetary easing.

Lagarde's political experience also makes her well-placed to make the case for

fiscal loosening to national governments, they noted.

     --OCTOBER MOVE

     One official thought further minor easing measures might be announced as

soon as October, perhaps relating to the parameters of the newly tiered deposit

rate. But others said the ECB was likely to wait before taking further action.

     "Another rate cut is potentially on the table," the third official said,

"but it's unlikely this will happen at the next few monetary policy meetings

left this year."

     "Obviously there will be nothing in October," the third official added,

while a fourth was of the view that the most exciting thing on the table at next

month's Governing Council meeting will be "coffee, cake and maybe a small sherry

to toast Mario. Barring a black swan, fresh policy changes will not be on the

discussion list."

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

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

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