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ECB to keep buying debt well into future

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Frankfurt am Main (AFP)

The European Central Bank is widely expected to end Thursday the "quantitative easing" (QE) programme that has seen it pump 2.6 trillion euros ($3.0 trillion) into the eurozone economy to stoke growth and inflation.

But even after net purchases of government and corporate bonds end, it will continue to stimulate the economy long into the future by reinvesting the proceeds from its mammoth stock of debt as it matures.

- Why reinvest? -

The ECB originally began buying debt in 2015, saying it wanted to fight the threat of deflation and keep money flowing around the eurozone economy.

Growth has picked up since then, surging in 2017 before falling back this year, but forecasts see inflation falling short of the central bank's target of close to, but below 2.0 percent.

Continued asset purchases by the central bank are aimed as before at pushing investors' money -- largely banks -- out of bond markets and into lending to firms and households to power expansion and price growth.

With clouds gathering over the eurozone economy and borrowing costs for highly-indebted members like Italy rising, the ECB is even less likely to quit markets for good.

- How will it work? -

The ECB will have around 200 billion euros in hand to invest over 2019 from maturing bonds, peaking at 31.6 billion in October after a trough of 5.4 billion in August.

Each maturing bond from a eurozone member state should in principle be replaced by one from the same country -- ensuring the central bank continues to parcel out its holdings in line with nations' shares in its capital.

That so-called "capital key" was recalculated this month based on the latest economic and population data, with France and Germany's shares increasing slightly while Italy's shrank.

The result: slightly more investment in German "Bunds" and less in Italian government debt.

- What could change in the scheme? -

ECB observers speculate about the bank buying longer-dated debt with the proceeds from its short-term bonds, mimicking the US Federal Reserve's "Operation Twist".

But it might vary the duration of its investments by country, buying longer-term Italian bonds and shorter-term debt from Berlin.

That would allow it to keep interest rates low in the places where more stimulus to economic activity is most needed -- and supporting capitals like Rome that are struggling under the most crushing debt burdens.

But the move could also expose it to criticism for failing to apply the same monetary policy across the whole eurozone.

Looking to head off such attacks, ECB President Mario Draghi reiterated that "to finance government deficits is not part of our mandate" in October.

- How long could the reinvestments last? -

Bank of France head Francois Villeroy de Galhau said a slowing of the reinvestment scheme "should not come until after the first increase in interest rates" from their present historic lows.

A first hike is not expected "at least through the summer of 2019" according to repeated ECB statements.

Across the Atlantic, the Federal Reserve kept its balance sheet at the same size for three years after ending its net asset purchases in late 2014.

But could the ECB start whittling its own down sooner?

"We should not bind ourselves for a long period of time" to continuing reinvestments, board member Sabine Lautenschlaeger told AFP in November.

For her, the programme should depend on how quickly inflation data shows price growth proceeding towards the central bank's target.

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