MNI INSIGHT: No ECB Policy Impact From Trade Dispute -- Yet `

--Draghi Warned EU Leaders On Impact From Auto Sector Tariffs

--Widespread Tariffs Could Spark CenBank Concerns

--No Expectations Of Return To Large Scale QE, Would Need Catalyst

--If Needed, ECB Would Prefer Delayed Rate Hikes Over QE Return

By David Thomas

     BRUSSELS (MNI) - European Central Bank President Mario Draghi intervened at

the recent European Council Summit to warn leaders that the impact of the trade

dispute with the U.S. was already hitting confidence levels across the single

currency bloc, MNI understands.

     Draghi also warned leaders that an escalation of the dispute into the auto

sector could wreak untold damage on the Eurozone -- and the wider European --

economy, with the impact on GDP seen as unknowable.

     MNI has been told by summit insiders that Draghi stressed there is no

scientific way of measuring the impact from any disruption in the global

production and supply chains that underpin the sector, as it was impossible to

tell whether global supply chains could be recreated on a more local footing.

     --POLICY IMPLICATIONS

     Further trade retaliation and widespread tariff increases would pose an

appalling dilemma for the ECB if growth slows but domestic prices are boosted by

climbing import prices.

     The Bank would normally look through a rise in the price of oil so long if

it was assured no second-round inflation effects would ensue. But

across-the-board tariff hikes, leading to widespread rises in consumer goods,

might be more likely to warrant a policy response.

     As things stand, the so far undramatic response of the economic data to

escalating trade tensions means that this month's ECB policy meeting and press

conference will be little more than an opportunity for Mario Draghi to field

questions on ongoing trade tensions.

     The July meeting will also come in the wake of the updated European

Commission economic forecasts, likely to follow the IMF in nudging down

estimates for the euro zone.

     The Commission is also likely to issue a warning on the downside risks to

economic activity posed by the escalating global trade war.

     --NO BIG-SCALE QE RETURN

     Despite the downgrades, MNI understands it will take a bigger crisis --

akin to the meltdown of the global financial system that loomed in the autumn of

2008 -- to get the ECB's Asset Purchase Programme re-started.

     If restarted, what form such a new hypothetical wave of QE might take is

one big problem, with ECB technocrats looking for assets to buy in a new sector

as the government bond market was "pretty much exhausted."

     But even were that to happen, officials say returning to the

E80bn-per-month purchases seen up until Dec 2017 is out of the question.

     --DELAYED HIKES PREFERRED

     If data does slow in coming quarters, further delaying rate hikes is the

more favoured policy tool if continued accommodation is deemed necessary, with

MNI being told if growth slows, and inflation doesn't pick up, then "the ECB

would just wait longer to raise rates,"

     But based on the current inflation expectations, the ECB will probably

"start an internal discussion on hiking rates in June of next year" and a signal

could be given of an autumn hike at the June 2019 press conference.

     When the first hike comes, whether in September or October, will likely

take the form of a rise in the deposit rate from -0.4% to -0.25%

     "The first hike would only be the deposit rate, either to -0.25" or, if

needed, "an even stronger signal to -0.1%," MNI was told, highlighting the

importance of the deposit rate, with the E600 billion of overnight deposits on

the ECB's balance sheet.

     Subsequent hikes in rates would then take place symmetrically across the

whole suite of policy rates.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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