MNI PREVIEW: ECB Set To Cut Rates, As Market Awaits QE Size

By Luke Heighton

     FRANKFURT(MNI) - The European Central Bank is set to cut its deposit rate

by 10 basis points or more at its meeting on Thursday, and to make further

dovish adjustments to its forward guidance, with investors waiting to learn the

size and duration of what is likely to be a fresh round of net asset purchases.

     Here are key points to look for from Mario Draghi's penultimate monetary

policy meeting:

     --WILL IT BE A PACKAGE?

     Accounts of July's meeting suggested multiple simultaneous measures would

be "more effective than a sequence of selective actions." This prospect is

supported by MNI sources, though some said any package may disappoint those

hoping for macroeconomic fireworks. Expect continued emphasis on the persistence

of downside risks, such as the U.S.-China trade conflict and Brexit, and words

to the effect that monetary policy isn't "the only game in town."

     --HOW LOW WILL THEY GO?

     Ten basis points appears to be the minimum, with a cut of some kind almost

a given. Tiering the deposit rate, along the lines of the Swiss National Bank,

is the most likely measure the ECB has been looking at to mitigate the effect of

negative rates on banks, and could allow for a deeper cut - now or in the

not-too-distant future. But tiering may be too complex and too divisive for the

time being.

     --ASSET PURCHASES

     Sources have told MNI to expect about E20-30 billion a month in bonds, with

an initial run of say six months, or E15 billion for 9-12 months. This would be

at the lower end of market expectations. Any decision on whether to raise issuer

limits or buy different asset classes (covered bonds and/or CSPPs to

bank-dependent small-medium firms) is set to be deferred. The possibility that

more QE might be announced but not triggered shouldn't be ruled out. It could

also be made more explicitly contingent on further economic deterioration.

     --FORWARD GUIDANCE

     A rate cut would be likely to be accompanied by a change in forward

guidance. The ECB could say it would not raise rates until inflation has reached

a specified target over a given period of time, although such a change might be

the subject of tough discussion within the Governing Council, with some members

suspecting that Draghi is attempting to leave policy settings on auto pilot

before Christine Lagarde succeeds him in the job. Instead, there could be more

focus on the "symmetry"of the inflation target. Sources told MNI forward

guidance would be "amended and strengthened," and that it could be extended.

     --TLTROs

     Announcing TLTRO-III in June, Draghi was asked whether they might yet be

repriced should Europe's economy continue to slide. With targeted longer-term

loans coming into operation exactly a week after this Thursday's meeting, now

might be the time to do so. But as one official told MNI, while it might be

possible to cut the headline rate by 5 basis points to 5 basis points over the

ECB's refinancing rate, "I can't see us cutting the refinancing rate into

negative territory."

     --A UNANIMOUS DECISION?

     It wasn't last time, and is unlikely to be this time around. Some suspect

central bankers are becoming bolder as Draghi term of office draws to a close.

More likely, those who always opposed the more unconventional aspects of

unconventional monetary policy are speaking out once more. But we may get hints

as to the levels and nature of any disagreement in Draghi's read-through of the

decision-making process, in addition to questions from reporters.

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

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