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Toeing The Line on Accelerated Taper

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Trend Direction Remains Down

By Luke Heighton
     FRANKFURT (MNI) - The ECB's March package of monetary policy measures was
necessary in light of the "sizeable moderation" in the pace of euro area growth,
according to the official account of the Governing Council meeting.
     Here are the key points from the minutes:
     -- "A number of members expressed an initial preference for extending
forward guidance through the end of the first quarter of 2020," to provide a
"clear easing signal" and be more in line with market expectations of a first
rate increase. Extending the guidance to the end of 2019 was seen to be more
consistent with the baseline scenario of a rebound in the second half of the
year.
     -- "Caution was expressed about committing to a longer horizon [...] in a
situation of high uncertainty where incoming data could evolve in different
ways," and a "data-drive gradualist approach was seen as most appropriate, while
it was also argued that the Governing Council should avoid giving the impression
that policy would be all but predetermined until the end of the year." "A
question was raised about how frequently forward guidance should be adjusted in
response to new data."
     -- A "sufficiently long" horizon for fresh TLTROs was seen as helping to
bring inflation close to target. A shorter horizon "would provide a stronger
signal to banks that they need to be prepared to secure funding on private
markets and avoid becoming overly reliant on central bank funding." Financial
stability considerations had to be taken into account, not least at country
level.
     -- It was "generally agreed" TLTRO pricing should be indexed to the main
refi rate, and there was "broad agreement that elaborating the details would
need more reflection by the Governing Council and they should be communicated in
due course."
     -- "It was underlined that that the decisions taken should be seen as an
appropriate adjustment of the instruments at the Governing Council's disposal in
reacting to a weakening of economic data and the inflation outlook and should
not be interpreted as a reversal of the policy stance."
     -- "It was also emphasised that while the growth momentum was weaker, it
remained positive," while the probability of a euro area or a global recession
remained "relatively low." A rebound of euro area activity in the second half of
the year was expected, thanks to the fading of temporary factors, improving
external trade and the easing of trade conflicts, and "a case could be made that
the risks to growth were somewhat more balanced" than previously.
     -- "The downside risks to growth in earlier discussions had "to some extent
materialised," the Council agreed. "The weakness in growth was seen as being
longer-lasting than had previously been expected, with the result that growth
was now likely to be below potential for a number of quarters."
     -- "Members acknowledged that [...] uncertainty remained elevated, and it
was unclear how persistent the current soft patch would turn out to be," though
there were some positive indicators relating to the impact of fiscal measures,
favourable financing conditions, the unwinding of certain temporary factors such
as those affecting the German car industry, and further gains in employment and
euro area wage growth.
     -- Members "generally agreed" that the cuts to ECB staff growth projections
implied a slower adjustment of inflation to the ECB's medium-term objective.
Nevertheless, "confidence in the upward movement of inflation dynamics was
expressed, even though the path for inflation was flatter than previously
expected."
     -- The transmission of higher wages to consumer price inflation remained "a
key issue" for the medium-term inflation outlook, with firms having absorbed
increases by lowering profit margins. "Some confidence was expressed," however,
that this would happen "eventually," with lags in transmission to be expected -
though it was noted that the slowdown in economic activity could also weigh on
the transmission mechanism, while the link between wages and price inflation
"might have changed structurally in recent years."
--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$E$$$,M$X$$$,M$$EC$]