MNI POLICY: Restarting QE Mentioned At ECB Meet, Draghi Says

By Luke Heighton

     VILNIUS (MNI) - The possibilities of restarting quantitative easing,

cutting interest rates or further extending forward guidance were all brought up

by members of the European Central Bank's Governing Council at its monetary

policy meeting, Mario Draghi told a news conference Thursday, as the ECB

announced it would keep key rates on hold until at least the second half of

2020.

     The ECB also offered pricing details for a third round of targeted

longer-term refinancing operations, due to start in September. Council members

were "unanimous," Draghi said, in deciding to set the interest rate at 10bps

above the average main refinancing operations rate over the life of each

operation - as predicted by MNI on May 31. If banks use enough of the funds to

lend to the real economy, the rate will be as low as 10 basis points over the

deposit rate.

     "Risks surrounding the euro area growth outlook remain tilted to the

downside, on account of the prolonged presence of uncertainties, related to

geopolitical factors, the rising threat of protectionism and vulnerabilities in

emerging markets," Draghi said.

     "At the same time, further employment gains and increasing wages continue

to underpin the resilience of the euro area economy and gradually rising

inflation."

     Draghi said the possibility that the ECB could eventually restart its asset

purchase programme or further extend forward guidance was raised by some

members, whilst others mentioned possible rate cuts.

     "The policy space is there and if contingencies materialise we stand ready

to act," Draghi said, but added that the council had not discussed "which

contingency would call for which instrument."

     "The use of forward guidance has been quite successful in steering market

expectations. It has become the major monetary policy tool," he said.

     Draghi reiterated the Council's confidence in its baseline assumptions, but

said a change in forward guidance had become necessary due to the prolongation

of uncertainties, as he called on "all countries" to achieve a more

growth-friendly composition of public finances.

     The Governing Council will continue to "monitor carefully the bank-based

transmission channel of monetary policy and the case for mitigating measures."

     Eurosystem staff macroeconomic forecasts showed annual real GDP is expected

to increase by 1.2% in 2019, 0.1 percentage point more than expected in March,

and by 1.4% in 2020, a forecast 0.2 percentage point lower. For 2021, the

forecast was reduced by 0.1 percentage point to 1.4%.

     Harmonised inflation is predicted to reach 1.3% in 2019, 1.4% in 2020 and

1.6% according to June's ECB staff macroeconomic projections. Compared with

March's assessment, the inflation outlook has been revised up by 0.1 percentage

point for 2019, and down by 0.1 percentage point for 2020.

     Measures of underlying inflation "remain muted," Draghi said, "despite the

somewhat better than expected data for the first quarter,' as global headwinds

continue to weigh on the euro area outlook.

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

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