MNI POLICY: Slower growth, weaker inflation in store, ECB says

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

observed.

     -- "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

jurisdictions".

     -- 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: luke.heighton@marketnews.com

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

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