November 13, 2018 / 3:20 PM / 5 months ago

REUTERS SUMMIT-ECB could surprise market by not tapering in 2019 - DWS EMEA CIO

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* For other news from Reuters Global Investment Outlook Summit: here

By Helen Reid

LONDON, Nov 13 (Reuters) - The European Central Bank may have to implement quantitative easing measures again in order to contain a worsening budget crisis in Italy, German asset management firm DWS said on Tuesday.

Georg Schuh, chief investment officer for EMEA at the 700 billion euro asset manager, told the Reuters Global Investment Outlook Summit that markets could be surprised by the ECB going down a similar path to the Bank of Japan, rather than the U.S. Federal Reserve which is tightening its policy.

The ECB has been gradually winding down its stimulus programme - launched to revive the euro zone economy and avoid deflation after the debt crisis - and its asset purchases will end this year.

However, Italy’s worsening economic outlook and the government’s backing for higher budget spending in a dispute with Brussels have caused yield spreads between Italian and German government debt to widen, reigniting concerns of a rift between core and periphery euro zone economies.

“The surprise for markets next year could be that the ECB is not tapering,” Schuh told the summit held at the Reuters office in London.

The BOJ promised in July to keep interest rates very low for an extended period as inflation remains far off its 2 percent goal.

Schuh said the ECB would be the most important issue for EMEA capital markets next year, especially as a new chief to succeed Mario Draghi is likely to be decided by mid-2019 and in October at the latest.

“In the end, it’s again and again only the ECB who is the backstop for any potential dangerous spread widening,” said Schuh, arguing the euro zone has very few tools outside of the ECB to control the Italian situation.

“I could even imagine that we might get a rate hike but maybe in the background there could be some preparation of QE,” he added, saying easing measures could include raising the issuer limit of high-grade countries or buying financial bonds.

If these measures are discussed and the rate rise is questioned, it could take 5 to 10 cents off the euro-dollar rate, Schuh predicted. DWS’s base case remains for an ECB rate increase in September or the fourth quarter of next year.

Reporting by Helen Reid, Editing by David Stamp

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