MNI SOURCES: Still Early For ECB To Consider QE

     LONDON (MNI) - Some European Central Bank officials have said quantitative

easing may return if necessary, but others doubt whether it will be possible

given limits on bond purchases and ECB officials told MNI no fresh major policy

action is likely during the remainder of Mario Draghi's term as president.

     "I wouldn't look too much into the discussion at this early stage, it's

more of a brainstorming. Way too soon," an ECB official told MNI, after Draghi

said at the ECB's June 6 press conference that Governing Council members had

raised the possibility of restarting its asset purchase programme or further

extending forward guidance. "But, as in the past, there are slightly different

views within the Governing Council."

     Some Council members argue that the ECB's ongoing reinvestment of maturing

bonds within its existing bond portfolio already constitutes a "mini-QE", and

that holdings are uncomfortably close to the limit of 33% of any individual

country's outstanding debt, the official said, adding that: "Others dismiss the

notion of market saturation. "

     "I believe there is no limit to what we can purchase, but we need solid

grounds to reboot," the source said. "We need a severe deterioration of economic

conditions and a new slip towards deflation to justify a reboot."

     The Bank of Finland's Olli Rehn has also called for quantitative easing to

be resumed "should economic developments so require."

     But, while ECB sources pointed to fears that the eurozone slowdown could

deepen, and to risks such as the China-U.S. trade dispute and Brexit which have

intensified in recent months, they stressed that QE would only reappear in the

case of a significant further economic deterioration.

     --NO MOVES UNTIL AT LEAST DECEMBER

     "If it gets worse, we will have to see, but it is not clear what has to

happen," another ECB official said, adding that economic data has been mixed and

that it was unlikely the ECB would take fresh major measures before Draghi

concludes his term at the end of October.

     "There is the September meeting, I don't see a big change there, unless

there is a summer crisis or something. So it would be reasonable to think that

the next big decision is likely to be December."

     At its June meeting, the ECB announced terms for cheap loans for banks in

the shape of a third iteration of its targeted longer-term refinancing

operations. The loans will allow banks to replace earlier TLTROs and satisfy net

stable funding requirements, and one source told MNI that it was possible that a

fourth round of the loans could be announced before the third has expired in

just over two years' time. Another ECB official said it was too soon to discuss

a TLTRO IV, but that the ECB would nonetheless have to consider any sudden

funding requirement facing banks when the upcoming round matures. A third source

said that TLTRO IV would not be impossible if the economy is weak, while a

fourth official dismissed the idea.

     ECB sources have previously told MNI that the central bank may be forced to

broaden the range of assets it purchases in any fresh range of quantitative

easing, maybe even to stocks. But one of the sources this time was sceptical of

such a move: "The end goal of QE is to create liquidity to support financial

markets by stabilizing the volatility of state securities and thereby keep under

control sovereign risk ... wouldn't stocks and the like actually infringe and

hinder such a key function? Wouldn't trading in such other instruments raise

volatility and by extension risk factors? I don't see that (option) as viable."

     Asked to respond to what the sources told MNI, an ECB spokesman said he

could not comment.

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

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