March 22, 2018 / 9:49 PM / a year ago

ECB to buy more German bank bonds to keep stimulus flowing

FRANKFURT (Reuters) - The European Central Bank will start buying bonds from a further seven state-owned German banks under its stimulus program, it said on Thursday, in a bid to avoid running out of debt to buy after three years of massive purchases.

European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

The seven regional banks, which include the Investitionsbank Berlin and Bavaria’s LFA Förderbank Bayern, join a small group of German development lenders whose debt the ECB has already been buying as part of its efforts to boost inflation.

The move slightly enlarges the pool of German debt which the ECB can tap as part of its 2.55 trillion euro ($3.14 trillion)quantitative easing scheme, thereby pushing back a looming cap on owning more than a third of any one country’s public debt.

With euro zone inflation now comfortably above 1 percent, the ECB is widely expected to wind down its bond purchases this year and even start raising interest rates towards the middle of 2019.

With Germany running a fiscal surplus, however, finding enough German bonds to buy has already become harder for the ECB, which has reduced its purchases of debt from Europe’s largest economy more than for other large countries in recent months.

The ECB has set out to buy government bonds in proportion to the amount of capital that each country has paid into the central bank, which in turn depends on the size of its economy.

Deviations from this so called “capital key”, however, have been substantial, with France, Italy and Spain enjoying oversized purchases while smaller countries such as Estonia and Portugal have fallen behind.

Greece has been excluded altogether due to its low credit rating and Cyprus has fallen out of the program for the same reason.

To see a list of debt issued by government agencies that the ECB is buying as part of its quantitative easing program, please click here

($1 = 0.8126 euros)

Reporting By Francesco Canepa; Editing by Kevin Liffey

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