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ECB is said to see higher reinvestments cushioning bond-plan end

[FRANKFURT] The European Central Bank is expecting to plow at least 160 billion euros (S$251.4 billion) of maturing debt back into bonds next year and could consider relaxing the rules on buying, according to euro-area officials familiar with the matter.

Such prospects would reduce the risk of market volatility that could undermine the economy after the ECB completes net asset purchases at the end of the year. Some of the people said reinvestments could be more than 160 billion euros, and one suggested the figure could be as high as 200 billion euros. The people asked not to be named because the internal projections are confidential.

Those numbers comfortably exceed the estimated 147 billion euros of reinvestments this year. To avoid volatility stoked by redemptions, the central bank may also need to consider revising current guidelines, such as the rule that reinvestments should be made within three months of a security maturing, two of the people said. An ECB spokesman declined to comment.

ECB President Mario Draghi's strategy of returning the proceeds of maturing debt back into its quantitative-easing program has gained in importance now that policy makers have decided to stop adding to holdings by the end of December, when they'll reach 2.6 trillion euros. The reinvestments will help calm any bond-market volatility that could push up financing costs for companies.

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"Certainly there is the collective intention of the Governing Council members to avoid any tightening of excess liquidity conditions or any unwanted tightening of monetary and financing conditions that may spur from the reinvestment," ECB President Mario Draghi said on June 14.

Smoothing markets is a key concern for policy makers, especially amid external risks such as trade protectionism. Draghi also stressed at an ECB conference in Portugal this week that the next leg of the euro area's economic expansion depends on businesses raising capital to expand their productive capacity.

"Signs of capacity constraints are now emerging," he said in Sintra on Tuesday.

"Growth has largely been achieved by applying more labor to existing capital. Firms should increasingly turn to capital to lift capacity - a process that has already begun as business investment has picked up and now stands above its pre-crisis level."

ECB Guidance on Asset Reinvestments

"The Governing Council intends to maintain its policy of reinvesting the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation."

The ECB publishes estimates for the amount of debt maturing over 12 months, meaning figures are available up to May 2019. They show redemptions of 91 billion euros in the first five months of next year.

Those monthly redemptions are uneven though, ranging between 11.9 billion euros and 25.4 billion euros. The ECB intends to review its own rules on reinvestments in coming meetings. Mr Draghi said last week that it is "an important decision again. It's not a marginal one at all."

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