ECB policymakers hone in on stimulus extension at lower volumes

By Balazs Koranyi

WASHINGTON (Reuters) - European Central Bank policymakers broadly agree to extend asset purchases at a lower volume at their October policy meeting with views converging on a nine-month extension, five people with direct knowledge of the discussion told Reuters.

With asset buys due to expire at the end of the year, policymakers are set to decide on Oct. 26 whether to prolong stimulus, having to reconcile between the bloc's best growth run in a decade with an inflation rate that will undershoot the ECB's target of almost 2 percent for years.

The next move, still up for discussion, is intended to signal both the need to cut support given strong growth, while at the same time committing to accommodation for a long time to come, the sources said.

The biggest debate is likely to be whether to keep the programme open ended, giving the ECB the flexibility to extend it once again, or to send a firm signal about the end, they said.

While hawks want the ECB to signal its intent to wind down and end the purchases, policy doves want at least the same type of flexibility the bank has now to extend purchases in case the outlook worsened.

"Whether it's open or closed ended is going to be the biggest debate," one person said. "I can see a compromise that we'll keep it like it is now, so with an end date that could let us extend again if necessary."

The exact amount of purchases is still up for discussion with views ranging between 25 billion euros and 40 billion euros a month, but the sources said there was consensus that they needed to be sharply reduced from their current 60 billion euro rate.

The ECB declined to comment. The sources said no formal proposals have been made.

9 MONTHS?

"The exact monthly volume does not matter greatly because its impact on inflation will be very small," one of the people familiar with the discussions said. "But a nine month extension also pushes out the first rate hike, and that's significant. It also has a strong signalling effect that substantial accommodation will continue."

The sources added that a six month extension is too short and policymakers would have to start debating this question soon, once again.

A longer extension, such as 12 months, though cannot be ruled out, is difficult because the ECB is running out of bonds to buy, so setting volumes according to what is available would results in relatively low monthly purchases.

ECB chief economist Peter Praet has recently argued that during periods of calm markets, a longer extension of asset purchases at lower volumes may be more beneficial as investors are better able to appreciate the long term support provided by the bank.

The sources added that the ECB may also decide to retain its guidance to raise asset purchases if the outlook deteriorates.

They also added that even if the ECB reduces its purchase of sovereign bonds, it was under no pressure to cut corporate bond purchases so it was possible those buys would be maintained near their current levels.

(Reporting by Balazs Koranyi; Editing by Tomasz Janowski)