By Frank Siebelt, Balazs Koranyi and Francesco Canepa
European Central Bank policymakers meeting on Thursday were in broad agreement their next step would be to cut bond purchases, with four options under consideration, two sources with direct knowledge of the discussion said.
Possibilities discussed by the ECB included – but are not limited to – cutting monthly assets buys from 60 billion euros now to 40 billion euros a month or 20 billion euros from the start of next year, with extension options including 6 months or 9 months, said the sources, who asked not to be named.
Any decision, likely come in October, should also be backed by a broad consensus, the sources said, with one suggesting a compromise could be found for setting monthly purchases somewhere between 20 billion euros and 40 billion euros.
This showed that policymakers are keen to avoid the repeat of the public discord that has marred the history of the quantitative easing programme since its 2015 launch, with decisions criticised by national central banks hostile to the policy and even by some within the ECB’s own Executive Board.
Indeed, Germany’s central bank governor Jens Weidmann, who has long called for the ECB to step off the QE pedal, struck a conciliatory tone on Friday by backing the decision a day earlier to put off any move until October.
“The increase in inflation is sluggish and the uncertainty about the future inflation path is quite large,” Weidmann, who sits on the ECB’s Governing Council, said.
“For this reason, the Governing Council has decided to wait and take its time to assess the monetary policy situation.”
He cautioned, however, that the ECB should be careful not to miss the right moment to act.
The ECB declined to comment on the report, which pushed the euro and government bond yields in the single currency bloc higher.
Worried about the euro’s strength, the bank stayed pat on Thursday, with President Mario Draghi honing in on October for the key decision after more than 2 trillion of euros worth of asset buys.
The cautious approach raises the chances that the ECB will opt to phase out quantitative easing, designed to boost growth and inflation, only very slowly next year, despite solid economic growth in the euro zone and worries about real estate bubbles in richer countries such as Germany.
Although the scenarios included specific monthly volumes and extensions, much of the focus of the discussion was on the overall amount of the purchases.
This includes the reinvestment of proceeds from maturing bonds, which will slowly rise towards 15 billion euros per month next year, the sources said.
Policymakers also agreed that interest rates will not be raised before the asset buys end, the sources said, indicating by default that any extension of the programme would also push out the first rate hike.
The sources added that the so-called issuer limit, which caps any ECB buying to a third of a country’s outstanding debt, is not up for discussion because it would open the programme, already under review by the European Court of Justice, for a legal challenge.
But maintaining the cap and the programme’s other self-imposed constraints would limit the purchases as the ECB is already approaching its limit in several countries – notably Germany, the euro zone’s biggest economy and the ECB’s top critic.
If purchases were left unchanged, Germany could hit the limit in the first half of 2018, according to analyst estimates.
This meant the ECB may have to deviate even farther from the national quotas adopted at the outset of the programme, which determine how much debt it can buy from each country depending on its shareholding in the central bank.
Indeed, the ECB has been buying fewer German and more Italian and French bonds than it is supposed to for months, with purchases of public-sector paper issued by Germany hitting an all-time low in August.
Such technical issues may have to wait until the ECB’s last meeting of the year in December, according to Finnish governor Erkki Antero Liikanen.
“We have a meeting in October where we will address these issues, and it could be that the fine-tuning on these issues will be made afterwards,” Liikanen told the Finnish parliament on Friday.
“So the details and parameters will be known well before the end of the programme.”