Draghi Says Don’t Worry About ECB Running Out of QE Buying Space

(Bloomberg) --

European Central Bank President Mario Draghi said there’s no reason to fret that his newly revived quantitative-easing program will run out space, with plenty of room to work around its legal constraints.

It’s going to “take quite a bit of time” before the problem of the so-called issue limit “will realistically present itself,” Draghi said on Thursday after his final policy decision before his term ends. “The European Court of Justice has granted ample discretionary power within the mandate to the ECB.”

The decision to restart QE as part of a stimulus package to revive euro-area inflation had a rocky start, with the measure opposed by around a third of the Governing Council and investors doubting that it can last long enough for inflation to reach the ECB’s goal. The program, which was contested in the ECJ, is constrained by rules aimed at ensuring the central bank doesn’t illegally finance euro-area governments.

What Bloomberg’s Economists Say...

“One way out of this bind would be to address constraints imposed by capital keys and/or issuer limits, but any alterations would be hotly contested by the hawks on the Governing Council.”
-David Powell. Read his QE INSIGHT

The issue limit is a self-imposed restriction that prevents the ECB from buying more than a third of each government’s debt, and Bundesbank President Jens Weidmann signaled recently that breaching that level would be a red line for him.

Another constraint, known as the capital key, is that the ECB’s bond purchases should be in rough proportion to the size of each member state’s economy. Draghi said that’s the chief area of flexibility as officials look at the overall holdings of debt -- known as the stock, currently 2.6 trillion euros ($2.9 trillion) -- rather than the monthly flow of spending, which will resume at a relatively minor 20 billion euros a month in November.

“We have capital-key rules in the way we purchase bonds and the relevant key is the stock of capital,” ECB President told reporters in Frankfurt at the final press conference of his eight-year term. “We don’t foresee substantial material deviations in the aggregate in the months and years to come.”

Draghi’s term ends on Oct. 31 and he declined to give public advice to his successor, Christine Lagarde. But he did hint that she should remember that the ECJ ruling gave the ECB plenty of leeway in determining what limits to QE are appropriate.

“Clearly these limits, and I said this again many times, first of all are self-imposed and secondly, are specific to the contingency in which they were originally stated,” he said.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Paul Gordon at pgordon6@bloomberg.net

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