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Toeing The Line on Accelerated Taper

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Trend Direction Remains Down

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
[TOPICS: M$X$$$,MT$$$$,MX$$$$,M$$EC$]