October 5, 2017 / 11:35 AM / 9 months ago

ECB debated QE extension trade-offs in September: minutes

FRANKFURT (Reuters) - European Central Bank policymakers last month debated the trade-off between various options for extending its asset buying, with some arguing that a reduction was warranted in any scenario, accounts of their meeting showed on Thursday.

The skyline, with its characteristic banking towers and the headquarters of the European Central Bank (ECB, R), are reflected in river Main in Frankfurt, Germany, ctober 1, 2017. REUTERS/Kai Pfaffenbach

Policymakers discussed the merits of a shorter extension of the program with a smaller cut in bond buys versus a longer extension with a bigger cut in volumes, the minutes showed, with broad agreement developing that they will most likely decide on what to do at their Oct. 26 meeting.

With its 2.3 trillion euro bond purchases scheme due to expire in December, the ECB is under pressure to decide what to do with it. It has to reconcile rapid economic growth and job creation with anaemic wage growth and an inflation rate that will undershoot its nearly 2 percent target into the next decade.

Markets currently expect the central bank to cut its purchase volumes by a third to 40 billion euros a month with the scheme seen being extended by six to nine months.

“Members also discussed some general trade-offs inherent in various scenarios for the future recalibration of the asset purchase program and, in particular, the choice between the pace and the intended duration,” the ECB said, describing the discussion as preliminary.

While the debate remains open, chief economist Peter Praet last week argued that calm market conditions would support the case for a relatively longer extension with lower volumes, suggesting that the ECB might be leaning toward the ‘lower but longer’ approach.

That could also suggest that the timing of any interest rate hike is also pushed further out as the ECB insists that the sequence of its next steps is not negotiable and any rate move would come well after the end of its asset buys.

“A view was put forward that conditions were increasingly falling into place that would allow the intensity of monetary policy accommodation to be adapted and would provide an opportunity to scale back the Eurosystem’s net asset purchases,” the minutes showed.

Sources close to the discussion earlier told Reuters that one of the biggest issues on the table was whether to keep the purchases open-ended or whether to fix an end date, likely resulting in a compromise that would make a further extension a viable option.

Rate-setters also noted that any change should apply to its entire policy package and should not be limited to any particular component, especially the size or duration of asset buys.


Revisiting their recent concern about the euro’s rapid rise against the dollar, policymakers expressed concern about the rapid currency move with some even arguing that the impact of the market move on inflation may have been underestimated, creating downside risks for some projections.

Indeed, Praet called for “close monitoring” of the exchange rate, a stronger phrase than was eventually accepted, with policymakers agreeing to drop the word “close”.

The euro EUR= is up nearly 12 percent against the dollar this year with ECB staff attributing a third of the move to monetary policy factors, with the rest due to demand factors and stronger growth and reduced political risk.

“At the same time, the questions raised about the treatment of the exchange rate in the current projections might imply some downside risks,” the minutes said.

A stronger euro reduced imported inflation and slows economic growth by making exports more expensive, a worry for the ECB as it seeks to foster the economic expansion.

Reporting by Balazs Koranyi; Editing by Hugh Lawson

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