Operation Twist Is Making Comeback as Option for ECB Stimulus

(Bloomberg) --

The European Central Bank would get more bang for its buck if it plowed its reinvestment into bonds with a longer maturity rather than restarting quantitative easing, according to Bank of America Merrill Lynch.

An operation twist -- as a swap from short-term bonds into longer-dated securities is commonly referred to -- would allow policy makers to maintain a “decent” amount of stimulus.

To gain more space, the ECB could lift the current 33% limit on how much it can buy of an individual bond without collective action clauses, Ruben Segura-Cayuela and Sphia Salim wrote on Monday.

“We wouldn’t rule out the ECB going for a ‘de facto’ operation twist instead of a small QE program,” they said in a note.

The policy, which was previously used by the Federal Reserve, has never been tried at the ECB, even though it’s been discussed as an option before.

While Segura-Cayuela and Salim said they are “skeptical more QE will help the economy much, particularly given the type of uncertainty,” they still predict the ECB will announce asset purchases of 30 billion euros ($33 billion) a month for as long as one year.

President Mario Draghi has signaled officials are working on a new stimulus package to jump-start the flagging euro-area economy. Finnish central banker Olli Rehn said last week the response should be significant and overshoot market expectations.

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

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Catherine Bosley

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