FRANKFURT (Reuters) – European Central Bank policymakers agreed at their meeting on Thursday that their next step would be to begin reducing their monetary stimulus, three sources with direct knowledge of the discussion said.
After 2-1/2 years of massive money-printing, the ECB is taking baby-steps toward weaning the euro zone off the easy cash that has helped boost the economy but is also blamed for creating bubbles in richer countries such as Germany.
The ECB left its policies unchanged on Thursday. But President Mario Draghi suggested October would be decision time regarding the future of the 2.3 trillion euros ($2.8 trillion) bond-buying program. Policymakers debated various scenarios, he said.
The four options being considered for reducing its bond buying, according to sources who asked not to be named, include cutting its monthly buying from the current 60 billion euros to 20 or 40 billion from the start of 2018, with the scheme running for another six or nine months.
The decision was likely to come at the Oct. 26 meeting and should be backed by a broad consensus, the sources said. One suggested a compromise could be found for setting monthly purchases somewhere between 20 billion and 40 billion euros.
The sources added that much of the focus of the discussion was on the overall amount of the purchases, including the reinvestment of proceeds from maturing bonds, which will slowly rise toward 15 billion euros per month next year, the sources said.
The ECB declined to comment on the report, which pushed the euro and government bond yields in the single currency bloc higher.
Despite solid economic growth in the euro zone, inflation has yet to rise back to the ECB’s target of almost 2 percent and has been further curbed by a recent rise in the euro against major currencies, which makes imports cheaper and exports less attractive.
The rally in the euro was raising the chances that the ECB would opt to phase out quantitative easing only very slowly next year and may look for other ways to support the economy.
The sources said policymakers also agreed that interest rates will not be raised before the asset buys end, indicating by default that any extension of the program would also push out the first rate hike.
Indeed, Irish central bank governor Philip Lane said on Friday the ECB would maintain its easy policy stance until it is happy with the path of inflation and cited a new round of cheap loans, or TLTRO, as one of its available tools.
Even 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.
“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.”
This showed that policymakers are keen to avoid a repeat of the public discord that has marred the history of the quantitative easing program since its 2015 launch, with decisions criticized by national central banks hostile to the policy and even by some within the ECB’s own Executive Board.
Any extension to the bond scheme will leave the ECB exposed to the risk of running out of eligible bonds to buy under the strict conditions it has set itself to limit market disturbance and not become a blocking minority in any country.
But the sources said 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 program up to a legal challenge.
Maintaining the cap and the program’s other self-imposed constraints would curtail 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.
This meant the ECB may have to deviate even farther from the national quotas adopted at the outset of the program, 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.
Some technical issues may have to wait until the ECB’s last meeting of the year in December, according to Finnish governor Erkki 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.
Reporting by Frank Siebelt, Balazs Koranyi and Francesco Canepa; Additional reporting by Jussi Rosendahl in Helsinki, Padraic Halpin in Dublin and other Reuters bureaus; Editing by Mark John