January 3, 2017 / 4:57 PM / 7 months ago

UPDATE 1-ECB slashes purchases of Portuguese debt as limit looms

3 Min Read

* ECB buys 40 pct fewer Portuguese bonds than rules dictate

* Portuguese inflation still low, outlook uncertain

* Frankfurt wary of hitting issuer limit (Recasts, adds detail)

By Francesco Canepa

FRANKFURT, Jan 3 (Reuters) - The European Central Bank bought far fewer Portuguese government bonds last month than its rules dictate, reducing its support for a country where government borrowing costs are rising and the economic outlook is uncertain.

The ECB has bought 1.53 trillion euros ($1.59 trillion) of bonds since March 2015 to boost inflation in the euro zone. But the results have been mixed - prices have accelerated sharply in Germany but remained sluggish in weaker economies like Portugal.

With its bond-buying scheme set to continue at least until December, the ECB has slowed down monthly purchases in Portugal to avoid hitting a limit on how much of the country's debt it can own.

The reduction in ECB purchases has never been as marked as in December, when the ECB bought 726 million euros worth - 40 percent less than it should have according to its own rules.

This reduced support has already taken a toll on Portugal, where government borrowing costs rose last year for the first time since 2011.

At the start of its programme, the ECB said it would buy government bonds according to how much of the ECB's own capital each country had paid.

On this measure, Portugal should account for around 2.5 percent of all euro zone government bonds bought by euro zone central banks, but they only made up 1.5 percent of the total in December.

Purchases of Irish bonds were also short of that country's share of the capital key last month, albeit to a lesser extent.

The ECB is already nearing a self-imposed limit of holding a third of both countries' debt due to the large amounts of bonds it bought under previous crisis-fighting measures.

If it touches that limit, it would have to stop buying Portuguese bonds altogether. That would likely have severe consequences on the Portuguese government's borrowing costs and its ability to spend. ($1 = 0.9632 euros) (Reporting by Francesco Canepa; Editing by Mark Heinrich)

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