December 22, 2016 / 3:25 PM / 2 years ago

ECB aims to wait for German elections before next move - sources

* ECB aims to wait until after German election

* No option off table if economy worsens

* To buy as few bonds as possible below depo rate

By Francesco Canepa and Balazs Koranyi

FRANKFURT, Dec 22 (Reuters) - The European Central Bank plans to keep debate about further stimulus closed until the second half of 2017, after the election in Germany where the bank’s loose monetary policies are politically charged.

Senior officials told Reuters that after years of crisis fighting - including philosophical clashes with Berlin - the ECB is conscious that its 2.3 trillion euro ($2.41 trillion) bond-buying programme is losing its impact and any major new moves could impact politics, leaving it exposed to criticism.

As well as Germany - where Chancellor Angela Merkel is seeking a new term - there are elections next year in the Netherlands, France and possibly Italy.

Of the four, the ECB is most likely to be an issue in Germany. Its policies are viewed by many Germans as depressing returns for savers and inflating property prices.

Having just extended the asset-purchase programme, the aim is to hold off any more moves until after the September vote, the officials said.

No option is off the table, the sources said, stressing that the ECB would intervene if growth slowed significantly or political risk, either from elections or policy shifts from the new U.S. administration, put pressure on markets.

“(But) if everything goes well, we won’t seriously debate the next policy move until September,” one of officials said.

The ECB declined to comment.

With growth holding up and inflation accelerating, officials argue that the ECB has done what it needed to get the bloc through the election year and the rest was up to governments as the bank’s power is mostly spent.

If euro zone inflation, currently at 0.6 percent, started drifting away from its objective of almost 2 percent, however, the ECB would not hesitate to do more.


If it needed to act, the first port of call would be to bump monthly bond purchases, due to be reduced to 60 billion euros from April, back to 80 billion euros, its current level, the officials said.

“If the environment changes again, the amount can go up,” one source said.

The terms of the programme could also be changed, along the lines discussed before the December meeting.

For instance, the ECB could ease a rule forcing it buy government bonds in proportion to each country’s share of the central bank’s capital, potentially making room for more purchases in highly indebted Italy.

In extreme scenarios, the ECB would even consider buying bank bonds, which it already accepts as collateral for central bank cash, or, at a pinch, stocks.


Faced with the risk of running out of debt to buy in Germany, the ECB relaxed the terms of the scheme earlier this month to include, albeit only “to the extent necessary”, paper that yields even less than its deposit rate, set at a negative 0.40 percent.

This would allow the ECB to continue its quantitative easing programme until the second quarter of 2018, according to Pictet estimates. But it comes with little benefit for the economy.

This is why the ECB will try to buy as few loss-making bonds as possible when it restarts its printing presses after the Christmas break, the sources said.

A negative yield means that the central bank will suffer a loss on the bond if it holds it until it matures.

Meanwhile, buying more debt for which demand is already strong, further depressing record-low borrowing costs for the euro zone’s richest countries, does little to boost the broader economy.

For this reason the ECB wants to keep those purchases to a minimum, hoping to take advantage from the recent surge in yields.

“If the trend in the bond market continues, it may push yields up and we may not need to use it in the end,” one of the sources said. ($1 = 0.9555 euros) (Editing by Jeremy Gaunt)

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