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By Luke Heighton
     FRANKFURT(MNI) - European Central Bank officials fear the eurozone economy
remains "fragile and fluid", minutes of last month's monetary policy meeting
show, but the fundamental factors supporting expansion remain in place and there
are upside as well as downside risks to growth.
     "All in all, members concurred with the view that risks to the euro area
outlook could still be assessed as broadly balanced", and "expressed confidence
in the medium-term outlook, while acknowledging the weakness of recent data and
indicators," the minutes showed.
     At least one Governing Council member argued that the balance of risks was
now tilted to the downside, "unless all shocks affecting the latest figures were
considered to be of a purely temporary nature".
     However, new upside risks have arisen from the further decline in oil
prices since the cut-off date for the ECB's most recent projections, together
with the likelihood of more stimulus from fiscal measures.
     A suggestion was made "to revisit the contribution of targeted longer-term
refinancing operations to the monetary policy stance," the minutes showed, as
predicted in a number of source-based MNI exclusives.
     "All members" agreed with the overall package of monetary policy proposals
announced following the December meeting, which included the end of net asset
purchases and the decision that reinvestments of maturing bonds will run for an
extended period of time beyond the dates when the Governing Council started
raising key rates.
     Chief Economist Peter Praet said global growth momentum was "moderating"
and global trade growth "stabilising", with the latest trade indicators giving
"mixed signals" while at the same time "pointing overall towards broad
     Euro area economic growth had slowed further on account of weaker external
demand, he said, in addition to sector and country-specific factors, with data
that had become available since the Governing Council's previous meeting "weaker
than expected".
     Yet the fundamental factors supporting the economic expansion remained in
place, Praet said, with private consumption expected to remain resilient, driven
"more by growth in compensation per employee and less by employment growth".
Business investment remained "solid" despite being weighed down by ongoing
uncertainty surrounding global trade and tariffs, and supported by favourable
earning expectations, resilient domestic demand and favourable financing
     Linking the reinvestment horizon to the interest rate lift-off - so-called
"chained guidance" - would strengthen the impact of rate guidance on financial
conditions "because market expectations for the reinvestment horizon would
evolve in line with expectations for the date of a first interest rate rise,"
Praet said.
     The Council agreed that a gradual slowdown appeared to be on the horizon,
but considered that some of the country and sector-specific factors behind this
deceleration were likely to unwind and that the economy "was still expected to
grow at a pace close to potential".
     "It was also argued even though certain downside risks - regarding trade
tensions, emerging markets, U.S. monetary policy and developments in sovereign
bond markets in the euro area - had receded, the continually changing nature of
risks would sustain - or even increase - general uncertainty".
     The situation remained "fragile and fluid", with risks including trade
issues and Brexit.
     The view that the pass-through of wages to prices was a key factor in
underpinning this confidence was "widely shared", though it was argued that the
strength of this effect "depended on the source of the shocks that were driving
wage growth', with the transmission of higher wages to consumer price inflation
requiring "more patience".
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$E$$$,M$X$$$,MT$$$$,M$$EC$]