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Still Looking For Weakness

By Luke Heighton
     FRANKFURT (MNI) - Euro area growth may be weaker and headline inflation
fall further than previously anticipated, the official account of the ECB's
January Monetary Policy meeting revealed Thursday.
     Technical preparations for a fresh round of targeted longer-term
refinancing operations (TLTROs) should "proceed swiftly", even if a decision on
their use should not be taken "too hastily".
     Governing Council members agreed it was too soon to tell whether the slump
in euro area growth was temporary or more longer-term, country-specific or more
general in nature, and agreed to wait until March growth projections before
reaching any firm conclusions.
     Here are key points:
     --Incoming euro area data had "generally surprised to the downside", Chief
Economist Peter Praet told the Governing Council, and near-term growth "would
likely be weaker than previously anticipated", even if private consumption
"could be expected to remain resilient".
     -- Financial conditions "had tightened somewhat", Praet said, but remained
"broadly supportive", even as risks surrounding euro area growth outlook had
tilted to the downside. "While the ongoing economic expansion continued to
support confidence in the convergence of inflation to the ECB's inflation aim,
recent developments called for thorough analysis as regards their implications
for the medium-term outlook", the account stated.
     -- There was "broad agreement" headline inflation is likely to decrease
further over the coming months, but underlying inflation was expected to
increase over the medium term, supported by ongoing economic expansion and
rising wage growth, although some deceleration in employment growth had been
     -- "The need to communicate cautiously was stressed, in order to the strike
the right balance between credibility in acknowledging the weaker than expected
data and conveying confidence in the adjustment towards the Governing Council's
medium-term inflation aim".
     -- "A number of remarks" were made on the subject of TLTROs, and it was
agreed that "while any decisions in this respect should not be taken too
hastily, the technical analysis required to prepare policy options for future
liquidity operations needed to proceed swiftly".
     -- Although it was emphasised that growth remained positive and the
probability of a recession "low", "the perception was widely shared that that
there was elevated uncertainty at present regarding how persistent the current
soft patch would be" - albeit to some degree offset by favourable financing
conditions, further employment gains, rising wages, lower energy prices and the
ongoing, of slower, expansion in global activity.
     -- The impact of new emissions testing in the auto industry was mentioned
as a dampening factor in the German economy, and it was noted that although new
registrations were rising again and there were signs it might now be ending, the
slump had lasted longer than initially expected.
     -- Members concurred that risks had now moved to the downside, with those
relating to heightened protectionism and Brexit increasingly weighing on
sentiment. However, "arguments were also put forward that an assessment of risks
to growth as still being broadly balanced could be supported by lower oil prices
and the stimulus from fiscal measures," while the negative impact from a shock
to global growth "could also be offset by policy responses in various
     -- It was "widely emphasised" that the transmission of higher wages to
consumer price inflation was a "key issue" for the medium-term inflation
outlook, but that there had so far been "little response in underlying inflation
measures to improving labour market conditions," with firms absorbing price
inflation by lowering profit margins. It was underlined that "more time and
patience were needed".
     -- However, it was also argued that more structural or longer-lasting
factors might still be at play", and "it was remarked that, alongside
uncertainty about the external environment, uncertainty regarding the euro area
economy had also risen [...] owing to not only oil prices but also the slow
pass-through from wages to prices".
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$E$$$,M$X$$$,MT$$$$,M$$EC$]