MNI PREVIEW: TLTROs, Tiering In Focus At Low-Key ECB Meeting

By Luke Heighton

     FRANKFURT(MNI) - The possibility of tiering the deposit rate and conditions

for a fresh upcoming round of cheap financing for banks will be key topics for

investors to monitor after what is expected to be a relatively uneventful

European Central Bank meeting in Frankfurt on Wednesday.

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

conference.

     --TIERING AND NEGATIVE RATES

     Surprise remarks by President Mario Draghi last month that the ECB needed

to look at ways to help lenders cope with negative rates prompted speculation

that tiering of the deposit rate and even further interest cuts might be on the

horizon. Draghi's responses to journalists' questions will be parsed for any

hint of such a move, even if, as one ECB official told MNI, the fact that a

measure may be under consideration doesn't mean it will enacted, and just

because "a couple of ECB economists are studying the impact of a trade deal with

Mars [...] it doesn't mean it's yet anywhere near the mainstream discussion."

     --TLTROs

     As the official account of the ECB's March meeting showed, there was broad

agreement that elaborating the details of a third round of targeted longer-term

refinancing operations "would need more reflection." That, plus the arrival in

June of updated ECB staff macroeconomic projections, implies policymakers would

prefer to delay any pronouncements on the spread and other conditions of the

cheap loans due in September until as late as possible. Questions are likely to

focus on whether conditions will be similar to or less favourable than TLTRO-II,

of if a dip in confidence may lead to something more generous.

     --GROWTH, INFLATION AND THE ECB'S MANDATE

     With further downward revisions to the ECB's growth forecasts expected,

progress toward the 2% inflation target "delayed", and Draghi admitting the

relationship between higher labour costs and higher prices may have

"structurally changed", concern is growing over the macroeconomic outlook.

Continuing downside risks coming from China, the U.S. and globally, would appear

to add weight to fears that eurozone growth "might not be mean-reverting, as

typically assumed in projections." While a majority of governors maintain their

confidence (at least in public), in reaching the ECB's medium-term inflation

target of 2% scepticism abounds as to the number and effectiveness of the

monetary policy weapons left in the ECB's arsenal - QE included.

     The ECB's persistent failure to meet its inflation target has prompted a

call by Finnish central bank chief Olli Rehn for a strategic review of the ECB's

"principles, key assumptions and instruments underlying its monetary policy."

     --FORWARD GUIDANCE AND DRAGHI'S SUCCESSOR

     With markets now not pricing in a hike until the start of 2021, any need to

adjust forward guidance in the short-term is moot. What isn't clear is the

extent to which decisions taken now tie the hands of Draghi's successor, whoever

he (or she?) may be, or whether that might be the intended outcome, given the

apparent resurgence of at least one prominent hawk in the race for the ECB's top

job.

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

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