October 2, 2017 / 1:22 PM / in 2 months

Calmer markets may call for smaller, longer ECB bond buys: Praet

LONDON (Reuters) - Relatively calm market conditions could encourage the European Central Bank to extend its asset purchase scheme for a relatively longer period but with reduced monthly spending, ECB chief economist Peter Praet said on Monday.

European Central Bank Executive Board Member, Peter Praet, speaks during a conference in Sofia, Bulgaria May 24, 2017. REUTERS/Stoyan Nenov

Praet, who sits on the ECB’s executive board, was addressing a conference in London just weeks before ECB policymakers meet to discuss the future of its bond buying.

“In more normal market conditions ... investors may become ‘more patient’, or, in other words, better able to evaluate the stimulus that can be expected to come from a purchase plan that is to be executed over a more extended time interval,” he said.

“In conditions in which uncertainty is high, frontloading the accumulation of a given stock of purchases more forcefully signals the central bank’s commitment to inject the degree of accommodation necessary to support the recovery.”

With the ECB’s asset purchases due to end in December, policymakers will discuss the future of its quantitative easing program on Oct. 26.

They are likely to debate the merits of extending the scheme for a relatively long period but with smaller monthly purchases or keeping bigger monthly buys for a shorter extension period.

Although Praet did not indicate a likely decision, measures of market volatility have been low, the euro’s exchange rate is in line with the ECB’s projections, bond markets are calm and commercial bank shares have climbed steadily since late August.

Policy hawks argue that with over 2 trillion euros worth of bonds already purchased by the ECB, new buying makes only a minor impact.

But Praet said that even if the ECB reinvests cash from maturing bonds, the average maturity of its portfolio is still likely to decline. Keeping the bank’s portfolio steady would thus naturally exert increasing upward pressure on term premiums and so tighten financial conditions.

In addition, issuance tends to rise, so a steady balance sheet would suggest the ECB is holding onto a decreasing portion of the market, Praet said.

Reporting by Marc Jones; Writing by Balazs Koranyi and Francesco Canepa; Editing by Catherine Evans

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