MNI PREVIEW: ECB May Add Easing Bias To Forward Guidance

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank may alter its forward guidance

to make clear that its next move in interest rates will be down at Thursday's

meeting of its Governing Council, sources have told MNI.

     Here are key points to watch for ahead of the ECB's July monetary policy

decision:

     --FORWARD GUIDANCE

     June's meeting in Vilnius saw the Governing Council alter its forward

guidance to say it expected key ECB interest rates to remain at their present

levels "at least through the first have of 2020." July could see policymakers

suggest rates "will not be raised" or will be kept at their present levels "or

lower".

     --QE

     Expectation that the ECB is preparing to restart its quantitative easing

programme has been building since June monetary policy decision, and received a

boost following Draghi's speech in Sintra just days later. The Executive Board

has repeatedly stressed its willingness to act, using all the tools at its

disposal as necessary. Still, it would a surprise if APP were relaunched this

week, given that we've heard little about how the ECB might get around its

existing (self-imposed) issuer limits, and the publication in September of new

staff macroeconomic forecasts providing a more obvious opportunity to do so

before Draghi steps down.

     -- INTEREST RATES

     After forward guidance, MNI sources suggest this where the first major

policy move is likely to take place, though there is disagreement within the

Council over both the necessity for, and the timing of, such a decision. The ECB

has been at pains recently to stress it will not be led by markets' inflation

expectations, which could be read as a signal it is not yet ready to cut deeper.

     --TIERING

     A subject of debate within the Council since at least March, tiering the

ECB's deposit rate appears to have many opponents. Nevertheless, the negative

effects of negative rates on banks' profit is something central bank chiefs are

watching closely, and we may well get more words to that effect.

     --INFLATION TARGET

     Some Governing Council members want to make the symmetrical nature of its

2% inflation medium-term inflation target more explicit, allowing policymakers

to tolerate a degree of overshoot. It would not be a shock if words to that

effect were included either formally in the text of July's policy decision, or

in President Draghi's remarks to journalists.

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

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