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ECB contemplated bolder stimulus before compromise - sources
December 9, 2016 / 2:49 PM / 9 months ago

ECB contemplated bolder stimulus before compromise - sources

The European Central Bank (ECB) headquarters is pictured in Frankfurt, Germany, December 8, 2016. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) - The European Central Bank contemplated even bolder stimulus measures than it agreed at Thursday’s meeting but scaled back in a compromise move when conservatives, joined by several swing voters, pushed back, two sources with direct knowledge said.

Much of the ECB staff’s preparation centred on a six month extension of its bond buying programme at a steady pace of 80 billion euros per month but ECB President Mario Draghi recognised that the proposal did not have a majority so he pushed for a compromise deal, the sources told Reuters.

The ECB then suggested a 12 month extension at 60 billion while more conservative nations were converging on six months at 60 billion. This led to the eventual compromise on nine months that still left Germany’s Bundesbank in opposition but gave some other hawks enough to secure a majority, the sources said.

The ECB declined to comment

The compromise illustrates the tension within the Governing Council and the fatigue with quantitative easing as inflation remains far below the target and growth is still weak, even after 1.5 trillion euros of asset buys.

But with elections looming in four of the euro zone’s five biggest economies, the bloc is facing increased uncertainty, essentially forcing the ECB to maintain extraordinary support.

Hawks argued that keeping the asset buys at 80 billion would give the impression that the asset purchases are open ended and it would also make its eventual end more difficult, either requiring a lengthy wind down or a steep reduction that could upset markets.

They also argued that the outlook for inflation and growth is relatively sanguine so the ECB would afford to preserve some of its firepower in case of a new inflation shock.

Although the Bundesbank has consistently voted against the asset buying scheme, the discussion still yielded some victories for the Germans, particularly in various changes to the parameters of the scheme, the sources said.

With the asset buys already extended twice, the ECB will run against many of its self imposed constraints by next year, requiring some changes. Although each modification carried some risk and opposition, the actual moves on Thursday were limited to relatively uncontroversial measures.

Germany was set against raising the issuer limit, which would let ECB buy more than 33 percent of each country’s debt. And Germany also fought against abandoning the so-called capital key, or letting the ECB buy bonds out of proportion to each country’s shareholding in the bank.

Increasing the issuer limit could make the ECB too dominant among bondholders and risk accusations it is financing governments. But maintaining the limit means the ECB would need to stop or reduce purchases in places like Ireland, Portugal, and eventually even in Germany as it runs against the boundary.

Editing by Jeremy Gaunt

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