MNI PREVIEW: TLTRO Terms, Growth Forecasts In Focus For ECB

By Luke Heighton

     FRANKFURT(MNI) - The terms of Targeted Longer-Term Refinancing Operations,

revisions to staff growth forecasts and a possible change in forward guidance

are expected to be key topics at next week's monetary policy meeting of the

European Central Bank.

     Here are issues to look out for from Thursday's statement and press

conference in Vilnius.

     --GROWTH

     Despite modest gains since the ECB's last monetary policy meeting in April,

the outlook still looks muted. Industry continues to lag services, while

household consumption and employment gains have slowed. April's core inflation

uptick has been attributed to the timing of Easter, even if there is no

deviation from the line that 2% HICP has been delayed, not derailed.

     June's growth forecasts are unlikely to be revised upwards, even if the

danger of U.S. tariffs on EU auto exports has been deferred, amid declining

confidence in the euro area's ability to exit economic stasis without further

central bank stimulus.

     --TLTROs

     June's meeting is likely to see the long-awaited announcement of terms for

TLTRO-III, plans for which were made public in March, with a maturity of two

years and an interest rate linked to the ECB's main refinancing rate. MNI

sources indicated the interest rate corridor available is "not very wide", and

that "from a maturity point of view, the terms are already tighter."

     The failure of the economy to pick up significantly means the likelihood is

that terms will be more generous than more hawkish Governing Council members,

who do not want to encourage weaker banks to continue their reliance on central

bank money, would have wished. Nevertheless, Mario Draghi will emphasise that

whatever decision is taken was the consensus of the whole group, and may even

have been unanimous.

     --FORWARD GUIDANCE

     While, it may be too early for a substantive change to forward guidance,

Mario Draghi could announce that the ECB anticipates leaving key interest rates

at their current levels until at least the middle of next year, closing the

distance somewhat between the ECB and market pricing for several weeks. Some

Council members regarded March's formulation, for rates to remain on hold until

at least the end of 2019, was optimistic. It would be a dovish surprise were he

to use forward guidance to suggest rates could even go lower, but journalists

may ask about such a move.

     --BALANCE OF RISK

     In his introductory remarks to the Financial Stability Review earlier this

week, ECB Vice President Luis de Guindos remarks described the current situation

as "more challenging than it was six months ago," and referred to "weaker than

expected growth and a possible escalation of trade tensions[that] could trigger

further falls in asset prices." Global headwinds continue to weigh on eurozone

growth, Draghi will say, and risks remain tilted to the downside.

     How the ECB might respond to a economic shock has long been a matter of

debate. Draghi has said he is "ready to use all instruments," in the ECB's

toolkit, without specifying what this contains. Talk of tiering the deposit rate

to offset the negative of negative rates on bank profits was met with scepticism

among governors. We are far from a restart of quantitative easing, let alone a

policy that risks crossing the boundary between monetary and fiscal policy.

     --SUCCESSION

     May's European parliamentary elections brought into focus the question of

who should succeeed Draghi. If asked about the matter, Draghi will defer to

Brussels. This will also be the first monetary policy meeting as Chief Economist

for Ireland's Philip Lane, after taking over from Peter Praet on June 1.

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

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