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--Technical Preparations Nearly Complete
--Revising Capital Key Politically Sensitive
LONDON (MNI) - Politics could delay an announcement of details of the ECB's
plans for the reinvestment of its maturing bond holdings, although technical
preparations will be complete by October ahead of the introduction of a new
capital key in the New Year, euro system sources have told MNI.
The issue of how to reinvest bonds which come due after the expected
conclusion of the ECB's asset purchase programme in December was barely
discussed at its monetary policy meeting on September 13, MNI understands, with
central bank staff still working on technical and operational details.
These preparations are now thought to be near completion, with a proposal
expected to be put to next week's general council gathering.
A formal announcement on reinvestments could be made immediately after the
monetary policy meeting on October 25th, though the politically-charged nature
of the issue may see it pushed back to November or December, sources said.
The ECB has come under fire from Italy's populist government over its
refusal to extend the APP, meaning that the upcoming revision to the capital
key, which sets rules governing how much of each country's bonds it can buy, is
particularly sensitive. The key is set by the ECB itself, but any changes will
require the support of Germany.
"The ECB will present a proposal next week. Up to now, this is simply about
technicalities - how to do it, how to keep the redemption shares under control,
what to do with the time packets and maturity packets and things like this, so
it's not something very fundamental," one source said.
"If the proposal faces no big discussion at the meeting, then perhaps they
could give some information on this at the first governing council meeting in
October. Because it's only technical this must not be done in a monetary policy
meeting. But they can have the first information there and decide at the end of
October on the policy issue."
Details about the duration of redemptions might also be delayed beyond
October, the source said.
Two further sources agreed that technical preparations would be complete in
October, with one adding: "In the end it will be a political decision. The
capital key will be revised as of Jan. 1 and we have to decide whether to base
reinvestment on the old or new key. Italy will have a smaller share in that new
key and Germany bigger."
A second possibility is that a new key could be phased in over time, the
source said, though the ECB would be reluctant to commit to keeping asset
purchases going for too many years to come.
Last week's ECB decision to keep key interest rates unchanged was widely
interpreted as further evidence the Bank feels it is on course to maintain
broad-based growth and inflation levels, with no change in policy expected
through the summer of 2019.
"We are staying on course," one source told MNI. "For sure, there are risks
from outside the zone - but domestically, the situation remains stable."
But another source said there is a feeling among some Governing Council
members that markets may be reacting too dovishly to the ECB's messaging.
"It was mentioned during the meeting that even the reaction to the July
decisions were seen, in particular taking the yield curve effects it had, were
perhaps interpreted too dovishly by the market."
"Last week the main point was a confirmation of everything decided in July,
so there was no need to change something."
--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com