European Central Bank policymakers are leaning towards making only nuanced changes to how the bank reinvests cash from maturing bonds, including keeping the duration of purchases open, four sources with direct knowledge of the discussion told Reuters.
With its unprecedented 2.6 trillion euro bond purchase scheme due to end next month, reinvestments are set to become an important policy tool, and investors are eagerly awaiting the bank’s long-flagged tweak of this instrument.
Policymakers are considering two or three options with regard to the duration of the reinvestments, but are leaning towards only an tweak rather than a broader overhaul, to maintain flexibility and avoid commitment.
Some are advocating the inclusion of a time reference, as in the case of the interest rate guidance. But the prevailing view is to make the duration conditional on the economic climate, inflation developments, liquidity conditions and interbank lending, the sources said.
They added that no decision has been made and the discussion is ongoing. An ECB spokesman declined to comment.
REDUCING MARKET IMPACT
The ECB’s current guidance says that reinvestments will continue for an extended period of time but chief economist Peter Praet this week said markets were right to expect a more precise definition at the Dec. 13 meeting.
However, the sources, who spoke on condition of anonymity, said they were comfortable with market expectations that the purchases would continue for two to three years, and that the aim of the upcoming decision was not to disturb these expectations.
They added that the ECB’s shift to a new shareholder structure, called the capital key, will also be tailored to make as little market impact as possible and could be done over the course of several years.
Two of the sources added there may be a discussions about the sequencing of future decisions and how interest rate changes would relate in time to the reduction of the balance sheet.
The sources said that policymakers were also considering three options with regard to how the capital key is applied to the 2.6 trillion euros’ worth of bonds already held by the ECB after the bank’s scheduled adjustment at the turn of the year.
The ECB must adjust its shareholder structure every five years based on a complex formula that takes into account GDP and population.
As Italy’s economy has underperformed peers in recent years, its share will shrink while Germany’s will rise. The change to the new capital key will thus paradoxically lead to the ECB supporting weaker members less.
To avoid a big market impact from the new capital key, some want to maintain the ECB’s stock of bonds as it is, taking a snapshot on Dec. 31, even though there has already been a deviation from the capital key. Others are advocating applying the current shareholder structure rigorously and adjusting this stock over time in line with the old key.
More conservative countries want the new capital key applied retroactively to existing holdings, and the stock of bonds to be adjusted over a set period, probably several years. But the sources said this was not seen now as the preferred option.