MNI POLICY: Signs Of Stability, Little Else - Dec. ECB Account

By Luke Heighton

     FRANKFURT (MNI) - Risks to the euro zone growth outlook have become less

pronounced, the Governing Council of the European Central Bank concluded last

month, while recent economic data and survey information contained some positive

signs pointing to stabilisation.

     The Governing Council reiterated its belief that the overall outlook for

Europe remained weak, with global risks tilted to the downside, despite early

indications that trade tensions between the US and China were diminishing,

according to the official account of December's meeting.

     Council members shared "widely" Chief Economist Philip Lane's proposal to

keep the ECB's monetary policy stance unchanged, and took the view that a

"steady hand" was needed in both policy and communication.

     There was little debate concerning the forthcoming strategic policy review

beyond suggestions that some "broad guidance" alongside a "likely timeline"

might be communicated, with governors urged to refrain from public discussions

on the strategy prior to its launch "in early 2020."

     Instead, "some discussion about how climate-related policies, including the

European Commission's Green Deal package, should be taken into account in the

projection exercises" took place, with members contending there was a need to

step up efforts to understand the economic consequences of climate change, along

with the effects of policies designed to mitigate the impact of climate change

on growth and inflation.

     Emphasis was again placed on the need for the ECB to remain attentive to

the potential side effects of its monetary policy measures, though "confidence

was expressed that policy rates had not yet reached the so-called reversal

rate."

     The package of measures adopted in September should also be given time to

exert their full impact on the euro area economy, it was argued, with one - the

introduction of a two-tier system for reserve remuneration - having proceeded

"very smoothly" and having worked "as intended," Council members concluded.

     But members noted that while market-based measures of longer-term

expectations had stabilised, longer-term inflation expectations continuing to

stand at historically low levels and clearly below the ECB's inflation aim.

     While it was accepted that the take-up of TLTRO-III would likely turn out

to be lower than expected, this should be assessed "together with the take-up in

future operations," and the overall success of TLTRO III "should only be judged

at the end of the programme."

     It was felt that "the important role of the Governing Council's

state-dependent forward guidance needed to be highlighted, as it might not have

been fully appreciated by market participants and ECB observers."

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

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