MNI SOURCES: ECB Readies Tiered Rate Cut, Unsure About QE

--ECB Set For Deposit Rate Cut In September

--Looking At Swiss National Bank's Tiering System

--No Consensus On Fresh QE

     LONDON (MNI) - The European Central Bank is readying a tiered cut in its

deposit rate in September, in a move which could increase the impact of promises

of possible future easing, but preparations for other potential measures such as

quantitative easing are still ongoing amid disagreements on the Governing

Council, ECB sources told MNI.

     Investors expect the ECB to cut its deposit facility rate by 10 basis

points from -0.4%, but officials said that, whatever the reduction, the

introduction of tiering will ensure forward guidance indicating more cuts could

follow is convincing.

     "If you have some measure to isolate banks from the excessive costs of

negative rates then you have more room for further interest rate reductions,"

one official said. "The forward guidance on the future direction of rates become

more credible."

     "It will probably be a simple, straightforward two tiers."

     Other ECB sources agreed a tiered cut was in the offing, despite initial

resistance from some national central banks. One source close to the Governing

Council agreed the likeliest move would be cutting the deposit rate to -0.5%.

The source was in favour of tiering along the lines of the Swiss National Bank's

system, under which negative interest is only charged on deposits in excess of a

threshold, which varies according to the bank.

     "If we do cut rates, tiering would be automatic," a second ECB official

said. "The Swiss model is being analysed as a case study, but I'm not saying

we'd be prepared to go that low. The Swiss went real low."

     --RATE CUT, NOT QE, SHOULD BE PRICED IN

     After its July 25 meeting, the ECB said it instructed committees to examine

methods of tiering. But another reference in its statement, to preparations for

possible quantitative easing, does not necessarily imply fresh QE is imminent,

officials said.

     "A rate cut in September should be fully priced in. As for the rest - let's

see, it depends on the data and how far we have to reduce the projections," a

third official said.

     A fourth ECB official pointed to disagreement within the Governing Council

on whether the eurozone economy needs more QE: "There's no point denying that

that is a point of difference on the Council. The concept that we must do

whatever it takes when needed still even now leaves plenty of room for

divergence on both 'whatever it takes' and 'when needed'."

     In July, the ECB promised to keep rates at present or lower levels through

the first half of 2020, or for as long as necessary to meet its inflation

target. This wording is likely to be retained after a cut, official said.

     "I don't think we would revert from the current language. If we did, we

chance being accused of giving with the left hand and taking with the right,"

one said.

     Asked about a possible September package including a rate cut and

quantitative easing, the first official was circumspect. One possibility might

be softer terms on cheap loans to banks via existing targeted longer-term

refinancing operations, the official said, although this has not been discussed

by officials.

     "Let's be prepared to be surprised. It's not easy to do more, but it's

quite easy to do less."

     The source close to the Governing Council was not expecting QE in

September: "I have no indication that it will be a bigger package, and it would

also be very difficult to introduce another round of asset purchases at the same

time."

     Any extension of QE will have to overcome the problem that the ECB only

permits itself to buy up to one third of any one country's government's bonds,

and, in the case of Germany, is close to the limit.

     One official said the ECB could buy corporate bonds, or exchange-traded

funds. Others were sceptical, although one said asset-backed securities and

covered bonds could be included: "Anything related to stocks is highly unlikely,

at least in the near future or as the first thing to do if QE is relaunched ...

QE is meant to boost financial markets' stability, not contribute to

volatility."

     An ECB spokesman told MNI he could not comment on the sources' remarks.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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