MNI STATE OF PLAY:ECB Reinvestment To Run Past First Rate Hike

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank will end net asset purchases

this month, but proceeds from its maturing stock of bonds will be reinvested for

an extended period of time after it starts raising rates, President Mario Draghi

said Thursday, noting that the balance risks to eurozone growth was "moving to

the downside."

     A conclusion to the expansion of the EUR2.6 trillion/$3 trillion asset

purchase programme had been anticipated since June, and was confirmed by the

Governing Council despite downward revisions to the ECB's growth forecasts.

     Weaker than expected data prompted the ECB staff to revise down projections

for growth this year, to 1.9%, and to 1.7% in 2019. A projection for 2018

inflation was revised up, as anticipated by MNI sources, to 1.8%, but 2019's

estimate was cut to 1.6%, further below the bank's 2% target.

     Draghi described the situation as one of "lower growth, but not low

growth". The underlying strength of domestic demand continues to underpin the

euro area expansion and gradually rising inflation pressures", he said,

supported by the strength of the labour market and rising wages.

     "The risks surrounding the euro area growth outlook can still be assessed

as broadly balanced. However, the balance of risks is moving to the downside

owing to the persistence of uncertainties related to geopolitical factors, the

threat of protectionism, vulnerabilities in emerging markets and financial

market volatility."

     In order to maintain an ample degree of monetary accommodation, the ECB

will reinvest in full the principal payments from maturing securities "for an

extended period of time past the date when it starts raising key ECB interest

rates."

     Previously, the ECB had only promised to continue reinvestments "for an

extended period of time after the end of the net asset purchases."

     The ECB will use its reinvestments to modify the composition of its bond

portfolio so that it reflects its new capital key -- which caps purchases of

individual countries' bonds according to their contribution to ECB capital - but

do so only gradually, so as not to unsettle markets, it said.

     The bank will also consider providing more liquidity to banks, Draghi said,

when asked about the possibility of fresh rounds of targeted longer-term

refinancing operations. TLTROs were mentioned by the Governing Council but not

discussed in any detail.

     The Council reaffirmed its intention to keep interest rates on hold at the

0.00%, 0.25% and -0.40% "at least through the summer of 2019."

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

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

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