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ECB policymakers leaning towards open reinvestment horizon

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ECB policymakers leaning towards open reinvestment horizon
FILE PHOTO: The euro sign in front of the former headquarters of the European Central Bank (ECB) is photographed with long exposure in Frankfurt, Germany, November 20, 2017. REUTERS/Kai Pfaffenbach/File Photo   -   Copyright  Kai Pfaffenbach(Reuters)
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By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – European Central Bank policymakers are leaning towards making only nuanced changes to how the bank reinvests cash from maturing bonds, including keeping the purchases open-ended, 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 a nuanced change 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 others are arguing for conditionality on economic and inflation developments, without reference to a certain period.

The sources added that no decision has been made and the discussion is ongoing.

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.

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.

Some want to maintain this stock as it is, taking a snapshot on Dec. 31, even though there has already been a slight deviation from the capital key. Others are advocating applying the current shareholder structure rigorously and adjusting this stock over time.

More conservative countries want the new capital key applied retroactively to existing holdings, and adjusting the stock of bonds over a set period, probably several years. But the sources said this was not seen now as the preferred option.

An ECB spokesman declined to comment.

(Reporting by Balazs Koranyi; Editing by Kevin Liffey)

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