European Central Bank policymakers are homing in on extending their stimulus programme for nine months at their next meeting while scaling it back, five people with direct knowledge of discussions told Reuters.
The ECB’s asset purchases are due to expire at the end of the year, and policymakers are set to decide on Oct. 26 whether to prolong them. They will have to reconcile the bloc’s best growth run in a decade with an inflation rate expected to undershoot the bank’s target of almost 2 percent for years.
The next move is still up for discussion, but there is a consensus that it should signal both the need to cut support in light of strong economic growth, while also committing to an extended period of monetary accommodation, the sources said.
The biggest debate is likely to be whether to keep the programme open ended, giving the ECB the flexibility to extend it once again, or to send a firm signal about the end, they said.
While hawks led by Germany want the ECB to signal its intent to wind down and end the purchases, policy doves want at least the same type of flexibility the bank has now to extend purchases in case the outlook worsens.
“Whether it’s open- or closed-ended is going to be the biggest debate,” said one of the sources, who are all on or close to the ECB’s Governing Council.
“I can see a compromise that we’ll keep it like it is now, so with an end date that could let us extend again if necessary.”
The volumes of monthly purchases under the extended scheme was still up for discussion, with views ranging between 25 billion euros and 40 billion euros. But the sources said there was a general feeling that they needed to be sharply reduced from the current 60 billion euros.
The sources said no formal proposals have been made.
The ECB declined to comment.
With the ECB having spelled out its intention to keep interest rates at record lows until well after the end of the bond buys, an extension of the programme effectively postpones the prospect of a first hike since 2011.
“The exact monthly volume does not matter greatly because its impact on inflation will be very small,” one of the people familiar with the discussions said.
“But a nine-month extension also pushes out the first rate hike, and that’s significant. It also has a strong signalling effect that substantial (monetary) accommodation will continue.”
The sources said a six-month extension was too short and would mean policymakers would have to start debating the same questions again soon.
A longer extension such as 12 months, though it could not be ruled out, was problematic because the ECB was running out of eligible bonds to buy, so setting volumes according to what was available would result in relatively low monthly purchases.
Specifically, the ECB wanted to avoid hitting a limit in respect of German bonds that bars it from owning more than a third of any country’s debt. That would force it to deviate farther from national quotas and buy more debt from other countries.
The head of Germany’s central bank, Jens Weidmann, stressed in an interview published by Wirtschaftswoche on Friday his opposition to breaking either of those constraints.
ECB chief economist Peter Praet has argued that during periods of calm markets, a longer extension of asset purchases at lower volumes may be more beneficial as investors are better able to appreciate the long-term support provided by the bank.
The sources added that the ECB may also decide to retain its guidance to raise asset purchases if the outlook deteriorated.
They also noted that if the ECB cut purchases of sovereign bonds, it was under no pressure to do likewise with corporate bonds, which might continue to be bought at near current levels.
Source: Reuters (Additional reporting by Francesco Canepa in Frankfurt; Editing by Tomasz Janowski and John Stonestreet)