MNI PREVIEW: ECB Set To Hold In 'Wait And See' Approach

--After June Move, Time And Data Offer Breathing Space

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank is set to keep monetary policy

unchanged Thursday, with the Governing Council likely to adopt a cautious "wait

and see" approach after better-than-expected data releases, while stressing that

it remains ready to act in the event of further pandemic disruption.

     Increases to the EUR1.35 trillion Pandemic Emergency Purchasing Programme

are unlikely, the ECB having bought itself time to assess the depth and the

spread of the damage done by the coronavirus. Recent assertions from the

Executive Board and Council members that the package may not be needed in full

should be treated with scepticism, though further efforts to signal to markets

that they should not become too used to large PEPP increases are possible.

     A tweak to the tiering multiplier in the targeted longer-term refinancing

operations is possible, although any discussion of including junk bonds in the

ECB's asset purchases is very much on the backburner. Recent strong TLTRO uptake

should reassure the ECB it is under no pressure to act immediately. However,

governors remain watchful for any signs of further tightening of financial

conditions, and any sudden changes in bond spreads.

     The ECB and the Bundesbank have put to bed, for now at least, any concerns

over the German Constitutional Court's ruling on its public sector purchasing

programme.

     --MOVING AHEAD

     Having come through what it is hoped will be the first and only 'hot' phase

of the crisis, Governing Council consensus is running high, though some points

of contention remain. The almost pessimistic tone so far adopted by the ECB

regarding the eurozone's recovery prospects stands in contrast to the

comparative optimism of some of its more hawkish members and suggests a robust

discussion of the size and duration of PEPP lies in store.

     There is also room for disagreement over precisely what PEPP is for - as

highlighted in remarks by Executive Board member Isabel Schnabel.

     First announced primarily as a safeguard of the monetary policy

transmission mechanism, by calming financial markets and heading off

fragmentation, the ECB now suggests it is a means to help return inflation

towards target.

     Other points of contention remain. What degree of deviation from the

capital key is tolerable? To what extent can this be offset through

reinvestments? How does one judge when the crisis is over? How sustainable are

current issuer limits?

     --CLARITY

     None of these questions is likely to be answered this week, but the need

for greater clarity could be highlighted by a renewed emphasis on the ECB's

monetary policy strategy review.

     With deflation is still a greater perceived threat than inflation, downside

risks and the uncertain outlook will remain the focus. A 'two-speed' European

recovery, coupled with the customary call for an effective fiscal response, will

also be on the agenda.

     Once again, the press conference will provide the fireworks, and with

reference to fiscal policy, there will be interest in whether President

Christine Lagarde is as forthright in offering advice to specific national

governments perceived to be blocking progress as some colleagues have been of

late.

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

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

[TOPICS: MT$$$$,MX$$$$]