MNI PREVIEW: ECB Set To Discuss TLTROs, Growth Forecasts Due

By Luke Heighton

     FRANKFURT (MNI) - Eurozone economic data continues to weaken but while it

is possible the European Central Bank's March meeting could see some

enlightenment on the Governing Council's current thinking on fresh targeted

loans for banks, it is unlikely to produce any tweaks to their forward guidance

on rates.

     As the ECB staff publish their latest forecasts, the GC will also question

whether the recent dip for the economy is temporary or the start of a

longer-lasting downturn.

     Here are key issues to look for in Thursday's statement and following press

conference.

--TLTROs

     Eurosystem sources were divided on whether new targeted longer-term

refinancing operations will be announced in March, with many saying a decision

is more likely closer to June's meeting. As the account of January's meeting

noted, the Governing Council took the view that technical preparations for a

fresh round of TLTROs should "proceed swiftly", even if a decision on their use

should not be taken "too hastily." New TLTROs are likely to have shorter

maturities -- at two years -- and less generous terms than previous rounds, they

said. Others mentioned the possibility that the repayment deadline for existing

loans could be extended. But there are signs of resistance to the idea in

certain quarters. Bank of Finland Governor Olli Rehn's recent remark that there

needs to be a "clear and convincing monetary policy case" echoed comments made

by the Bundesbank's Jens Weidmann and the Bank of France's Francois Villeroy de

Galhau.

--FORWARD GUIDANCE

     MNI sources saw a lower probability of a change to the wording of interest

rate forward guidance at the March meeting, but the "through the summer"

formulation introduced in June 2018 will lose its relevance before the departure

of bank's president, Mario Draghi, at the end of October. The ECB could

streamline its forward guidance to simply emphasise that interest rates will

remain unchanged for "as long as necessary" once it drops its reference to

"through the summer of 2019" at some point over the next few months, Eurosystem

sources told MNI. 

     Chief Economist Peter Praet has said there will be a "point in time when

the calendar-based leg of our forward guidance will be discussed and, if needed,

adapted." It is likely that the issue will be on this month's agenda and a

possible timetable for future decisions could even be raised. However, in the

words of one Eurosystem source "the idea would be to shift the end date until

after the date the new president comes in. That's perhaps most important".

--BALANCE OF RISKS

     After January's recognition that the balance of risks has shifted to the

downside, there is little prospect of a change this time round. Yet the

possibility that risks to growth could lead to downside inflation risks in the

medium term is something that has been preoccupying Peter Praet, to the extent

that he has said it will be "an important discussion point at the next meetings

of the ECB's Governing Council". The threat of 25% tariffs on European cars

entering the US -- which MNI analysis has shown could knock 0.2pp from annual EU

GDP growth and a chunky 0.6pp from the German economy -- will be a point of

concern, as could be a disorderly Brexit.

--GROWTH AND INFLATION

     ECB officials have said the slowdown is likely to be temporary. But Bank

staff forecasts are likely to be downgraded. The account of January's meeting

showed there was "broad agreement" that headline inflation was likely to

decrease further over the coming months, and officials have admitted that the

passthrough from wage developments to consumer price increases "has not not

worked out as expected." Despite these doubts, Thursday's message is likely to

be close to the assertion of Vice President Luis De Guindos that "even if energy

prices were to fall a little in the coming months, we are confident that

inflation will, over the medium term, converge towards our aim of below, but

close to, 2%."

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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