FRANKFURT Feb 4 The European Central Bank has
discussed the possibility of suspending operations to soak up
money it spent on sovereign bonds but this is just one policy
option and is unlikely to be decided this week, people familiar
with the issue say.
Ending the so-called "sterilisation" operations would inject
about 175 billion euros ($237 billion) of liquidity into the
financial system, which would help ease strains in euro zone
An "unwarranted" tightening of short-term money markets was
one scenario President Mario Draghi set out after the ECB's
January meeting that could trigger policy action. The other was
a deterioration in the medium-term inflation outlook.
The ECB holds a policy meeting on Thursday.
But new ECB economic forecasts due for the March policy
meeting will give the Governing Council fresh grounds to review
its policy stance and could be the occasion for a review of the
liquidity stance too, said one person familiar with the issue.
Liquidity is the key issue for determining whether to
suspend the sterilisation of the now-terminated Securities
Markets Programme (SMP) to allow liquidity levels to rise.
In weekly transactions, the ECB takes deposits from banks to
offset its spending on the SMP bonds, to ensure that the debt
purchases will not trigger inflation.
If the central bank were to suspend the operations, this
would lift the amount of so-called excess liquidity
- money banks have beyond what they need for their day-to-day
operations - in the financial system.
"I do not see any risk but also not much benefit in this,"
said Berenberg bank's Christian Schulz, a former ECB economist.
"Stopping sterilisation would increase excess liquidity and
thus drive down EONIA again. But at 15bp, its level is hardly a
major issue," he added.
EONIA overnight lending rates spiked above the
ECB's key rate - currently at 0.25 percent - last month after a
drop in excess liquidity as banks repaid early big chunks of
crisis loans they took from the ECB two years earlier.
Overnight rates have since fallen and traded at 0.14 percent
on Monday as the tensions eased. But excess liquidity is set to
fall back again this week to the levels that sparked volatility
in bank-to-bank lending rates last month.
The ECB absorbed the full amount of its SMP programme on
Tuesday, withdrawing 175.5 billion euros from the market -
around 24 billion euros more than last week. It also allotted
some 20 billion euros less in its weekly refinancing operation.
This means the amount of excess liquidity will fall to some
140 billion euros from 186 billion euros once the operations are
settled on Wednesday - a level that saw EONIA rates spike above
the ECB's key rate last month.
One argument against suspending the sterilisation operations
would be to avoid raising questions about ECB policy ahead of a
ruling by the German Constitutional Court on the central bank's
new bond-buying programme.
The court is considering whether the ECB's plans to buy
"unlimited" amounts of bonds from stricken euro zone states,
announced in 2012 at the height of the euro zone crisis, is
really a vehicle for funding member states through the back
door. That could violate German law.
Purchases made under the yet-to-be-used bond plan are meant
to be sterilised. Suspending the SMP sterilisation might raise
questions about ECB policy ahead of the court ruling.
"It could provoke the German Constitutional Court, which may
feel that the ECB is changing the rules of the SMP ex post" said
JP Morgan economist Greg Fuzesi.
Berenberg's Schulz played down this concern: "The court
should not be concerned by this," he said. "The SMP stock will
decline over time, so the action would be limited in time and
($1 = 0.7397 euros)
(Editing by Jeremy Gaunt)