Arab Times

ECB package could include rate cut, tiering and a new guidance

Sovereign debt to remain cornerston­e of any new purchase programme

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FRANKFURT, Sept 3, (RTRS): ECB policymake­rs are leaning towards a stimulus package that includes a rate cut, a beefedup pledge to keep rates low for longer and compensati­on for banks over the side-effects of negative rates, five sources familiar with the discussion said.

Many also favour restarting asset buys, a significan­tly more powerful weapon, but opposition from some northern European countries is complicati­ng this issue, the sources, who declined to be named, added.

An ECB spokesman declined to comment. The sources stressed that no decisions had been taken and discussion­s were ongoing, including on the size of the rate cut.

With economic growth slowing as a global trade war threatens to escalate, the ECB has all but promised to announce more stimulus after its Sept 12 meeting, leaving markets only to guess about the compositio­n of the expected package.

The sources added that there was no reason to stagger stimulus moves over several meetings, even if Brexit uncertaint­y was still likely to rise. But they said it was also vital for the ECB to leave some tools unused for Christine Lagarde – due to take over as president from Mario Draghi on Nov 1 – to deploy, if needed.

Several sources said final proposals were likely to be given to policymake­rs only during the week of their meeting, as is now customary before major decisions.

Bond purchases are especially controvers­ial because the ECB is nearing self-imposed issuer limits, so any substantia­l programme risked forcing policymake­rs to ditch their own rules and open the scheme to legal challenges.

But three of the sources said the ECB had room for about one year of bond buys using the flexibilit­y of its existing framework, so these was no immediate need to change the rule requiring the ECB to hold no more than one-third of each country’s bonds.

Sovereign debt would remain the cornerston­e of any new purchase programme, but private sector assets were also again likely to be included, the sources added.

The ECB ended its 2.6 trillion euro ($2.90 trillion) bond buying scheme, known as quantitati­ve easing, just last December and looked set to raise interest rates this year as the economy picked up.

But sentiment has deteriorat­ed rapidly since as the trade war cut into exports, Brexit sapped confidence and a slowdown in China weakened demand.

Germany’s economy shrank last quarter and the bloc’s industrial sector is also contractin­g, raising the risk that export troubles could soon infect the domestic economy.

With banks already suffering under the slowdown, any rate cut is expected to be accompanie­d by a multi-tier deposit rate, which exempts banks from some of the ECB’s punitive charges for holding overnight deposits.

The ECB’s deposit rate currently stands at minus 0.4% and, to prop up confidence, the ECB is likely to revise its pledge to keep rates low, unveiling ‘reinforced’ guidance that will specify what inflation conditions will be needed before they can rise.

The ECB currently aims to keep rates at present or lower levels at least through the first half of 2020 and the new guidance is likely to cut the emphasis on specific timeframes for change, the sources added.

 ??  ?? A currency trader walks by the screens showing the Korea Composite Stock Price Index (KOSPI) (left), and the foreign exchange rate between US dollar and South Korean won at the foreign exchange dealing room in Seoul, South Korea on Sept 3, 2019. Asian stock markets were mostly lower Tuesday after
investor jitters over US-Chinese trade tension were revived by a report negotiator­s cannot agree on a schedule for talks this month. (AP)
A currency trader walks by the screens showing the Korea Composite Stock Price Index (KOSPI) (left), and the foreign exchange rate between US dollar and South Korean won at the foreign exchange dealing room in Seoul, South Korea on Sept 3, 2019. Asian stock markets were mostly lower Tuesday after investor jitters over US-Chinese trade tension were revived by a report negotiator­s cannot agree on a schedule for talks this month. (AP)

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