MNI SOURCES: Politics May Delay ECB Reinvestment Announcement

--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.

     --ITALY

     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.

     --CAPITAL KEY

     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

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