ECB has two weeks to devise a plan that will not disappoint – Today Digital (Dominican Republic)

ECB would LBOs even in cases where the yield is lower than deposit rate.

Jeanna Smialek and Lucy Meakin

a Mario Draghi will have two weeks to decide how to intensify the stimulus so that no angry or colleagues or investors.

When the makers of the policy of the European Central Bank meet in Frankfort on 9 and 10 March, analyze whether negative interest rates and EUR 60,000 million (US $ 67,000 million) monthly debt purchases enough to revive consumer prices. In both markets take into account other rebate rate, the big question is how to customize quantitative easing.

The ECB president said that there are limits to what they can make decision makers policy within its powers, but the sub-zero rates involve risks and as for the expansion of the QE, from words to a long step. Draghi walk a fine line between convincing investors that can overcome obstacles and avoid disappointment on the market that held the last adjustment in December.

“It will be very difficult” to increase QE, said James Nixon , an economist at Oxford Economics Ltd., which still expects a move. “We should go somewhat against the rules. It could be very interesting to see if Draghi, as it tends to do when faced with these situations, pulls another rabbit out of a hat “.

Then, options and major obstacles.

Rebate rate. A reduction in the deposit rate of at least 10 basis points from the level of less than 0.3 percent now is fully expected by investors show Eonia forward contracts.

Since this crush yet the profitability of lenders, officials could consider a two-tiered rate or grant exemptions higher reserve requirements, strategies used by peers as the Swiss National Bank. ECB Vice President Vitor Constancio said last week that officials must “mitigate the effect (of easing) on ​​the banks.”

More QE. To alleviate dependence on German debt, the ECB could delete the key for capital subscription purchase linking the economic dimension. This would allow other countries with outstanding debt, such as Italy, buy a proportion mayor.Esta strategy it would seem that the ECB supports countries that carried forward tax riskiest policies. could Worse, attract accusations of monetary financing, which the law prohibits the European Union.

decouple from the deposit rate. The ECB would LBOs even in cases where performance is lower than the deposit rate. This equates to ensure losses, since the income of the deposit system would not cover the deficit on bonds held to maturity.

Buy other assets. The central bank could expand asset classes suitable for QE, perhaps adding corporate bonds. The concern is that probably not enough corporate debt available. According to Anatoli Annenkov, an economist at Societe Generale SA “there is already much liquidity squeeze.”

Raising the emission limit. In September, the ECB raised the ceiling on the proportion of each bond issue that banks can buy. You can do it again, but probably would be limited to titles without collective action clauses, which give a blocking minority that the central bank does not want.

Do not change the QE. If policy makers are at an impasse, the easiest solution would be to leave the QE as it is, relying on the contrary, in a marked reduction in the deposit rate. However, the Governing Council will take care to disappoint investors. On December 3, when the rate 10 basis points was lowered and the QE was extended six months both monthly level remained unchanged, the euro rose highest since 2009 and bonds plummeted.