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By Luke Heighton
     FRANKFURT (MNI) - The European Central Bank stands ready to use all policy
tools at its disposal should the economy deteriorate, President Mario Draghi
said, although he added that the possibility of tiering the deposit rate to
offset the effects of negative rates on bank profitability wasn't discussed at
Wednesday's monetary policy meeting.
     "We're ready to use all instruments. All instruments," Draghi told a news
conference. But he added that in order to reap the full benefits from monetary
policy measures, "other policy areas must contribute more decisively to raising
the longer-term growth potential and reducing vulnerabilities. All countries
should reinforce their efforts to achieve a more growth-friendly composition of
public finances."
     In its statement following the meeting, at which it decided to keep key
rates unchanged until at least through the end of 2019 , the ECB said it would
"consider whether the preservation of the favourable implications of negative
interest rates for the economy requires the mitigation of their possible side
effects, if any, on bank intermediation."
     But Draghi said neither the "merits or the cons" of mitigating their
effects or specific measures to counter their side-effects, had been discussed.
     Neither were precise terms of upcoming TLTRO-III loans to banks discussed,
Draghi said, although these would be communicated "at one of our forthcoming
meetings." Wednesday's gathering in Frankfurt was "one where the main goal was
to reassert the readiness to act if the contingency warranted, so it was not an
operational meeting."
     Draghi confirmed that slower growth momentum is expected to extend into the
current year. Despite "signs that some of the idiosyncratic domestic factors
dampening growth are fading," global headwinds persist, he said, and risks
remain tilted to the downside.
     Draghi moved to allay market concerns over a yet another drop in headline
inflation, saying he expected it to "bottom" in September - offset by employment
gains, rising wages and high levels of capacity utilisation that "continue to
underpin the resilience of the domestic economy and gradually rising inflation
pressures."
     "We remain fully committed to return inflation to 2% without any undue
delay," he added. "Our inflation aim does not imply a ceiling at 2%. Inflation
can deviate from our inflation objective as long as the sustainable path
converges to our medium-term aim."
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$X$$$,MT$$$$,MX$$$$,M$$EC$]