ECB said to consider cutting QE purchases in half next year

[FRANKFURT] European Central Bank officials are considering cutting their monthly bond buying by at least half starting in January and keeping their program active for at least nine months, according to officials familiar with the debate.

Reducing quantitative easing to 30 billion euros (S$48.13 billion) a month from the current pace of 60 billion euros is a feasible option, said the officials, who asked not to be identified because the deliberations are private.

While the central bank's governors are split on the need to identify an end date for purchases, a pledge to keep buying bonds until September - with the proviso that it could be extended if needed - may offer grounds for compromise, they said.

Policy makers led by President Mario Draghi are becoming increasingly confident that ECB policy makers will on Oct 26 agree to the specifics of how much debt the euro-area's central banks will buy in the coming year.

 After more than 2 1/2 years of trying to revive the region's economy through bond purchases, some governors see the recent period of robust growth as a reason to rein in the support. Others are concerned that inflation remains too weak.

Any changes to the sum and time frame of quantitative easing would still fit into the ECB's present guidance on monetary policy, which commits the ECB to promise "a sustained adjustment in the path of inflation consistent with its inflation aim".

It also pledges that if "the outlook becomes less favorable, or if financial conditions become inconsistent with further progress toward a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the program in terms of size and/or duration."

Council members have yet to officially discuss options.  An ECB spokesman declined to comment.

The euro strengthened as much as 0.2 per cent against the US dollar on the news.

It was trading at 1.1839 at 8.56am in Frankfurt on Friday. Euro-area 10-year government bond yields were a basis point or two lower across the core and most periphery markets.

The institution's chief economist Peter Praet has hinted on several occasions that he would prefer to allow QE to continue at a slower pace for longer if markets stay calm, arguing that a substantial amount of aid is still needed to spur inflation toward the ECB's goal of running inflation just below two per cent.

He also said this week that officials should consider making public some of the details on how maturing debt bought under QE is reinvested.

"Crucially, the baseline scenario for future inflation remains contingent on easy financing conditions, which, to a large extent, depend on the support of monetary policy," Mr Praet said at an event in Washington on Thursday.

The ECB Governing Council "will recalibrate its instruments accordingly, with a view to delivering the monetary policy impulse that remains necessary to secure a sustained adjustment in the path of inflation."

In the meantime, Mr Draghi said in Washington that the ECB's promise that interest rates will remain low "well past" bond-buying is "very, very important".

The IMF this week predicted the euro area will grow 2.1 per cent this year before slowing to 1.9 per cent in 2018. It estimated inflation of 1.5 per cent this year and 1.4 per cent next year.

BLOOMBERG