MNI POLICY: ECB's Two-Part Guidance Crucial, De Guindos Says

By Luke Heighton

     FRANKFURT (MNI) - The current formulation of the ECB's forward guidance

remains "crucial" to preventing "premature expectations" of a hike to key

interest rates, Executive Board member Luis de Guindos said Monday.

     Here are key points from his speech in Madrid:

     --De Guindos said the date-based and state-contingent nature of the ECB's

forward guidance on policy rates "remains crucial". "The date-based element

ensures that our stimulus is not weakened by premature expectations of a rate

hike. The state-contingent element, in turn, ensures that the stance will

continue to evolve gradually and in a data-dependent manner." ECB guidance calls

for rates to remain at present levels at least through the summer of 2019, and

in any case for as long as necessary to ensure sustained convergence of

inflation on target levels.

     --Euro area data has been weaker than expected in recent months, De Guindos

said. Trade disappointed, with noticeable declines in net exports, leaving

economic growth weaker than expected. Near-term growth is likely to be weaker

than previously foreseen.

     --Idiosyncratic factors such as temporary issues in the automotive sector,

street protests and weather conditionsplayed a part in stifling growth. "While

there is uncertainty about the magnitude and persistence of these factors,

near-term growth in the euro area is likely to be weaker than previously

anticipated."

     --Global growth is showing signs of a maturing economic cycle, and while

global activity is still expanding, growth in important euro area trading

partners, such as China, has been moderating. This has fed through to lower euro

area exports. Geopolitical uncertainties, the threat of protectionism,

vulnerabilities in emerging markets and financial market volatility "have proven

to be more persistent than initially foreseen. In Europe in particular, the

state of play of the Brexit negotiations is adding to the uncertainty."

     --However, "sound factors of resilience are in place, with euro area

expansion "expected to continue, supported in particular by favourable financing

conditions, further gains in employment, rising wages and lower energy prices.

Rising wages should continue to underpin household income and private

consumption. Lower energy prices are supporting real incomes and should provide

an additional impetus to domestic demand. High levels of capacity utilisation

should continue to strengthen labour cost pressures."

     --Wage growth has become increasingly broad-based, and, in conjunction with

the ECB's monetary policy measures and ongoing economic expansion, is expected

to translate into higher underlying inflation over the medium term.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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