MNI REVIEW: ECB Signals Next Move Is Cut, Paves Way For QE

By Luke Heighton

     FRANKFURT (MNI) - The ECB took major steps towards a return to quantitative

easing, as well as an interest rate cut, a tiered deposit rate and changes to

forward guidance on Thursday, increasing the likelihood a package of policy

decisions could be announced in September.

     There was "broad agreement on the current outlook at today's meeting,"

President Mario Draghi told journalists in Frankfurt, with work having already

begun on "assessing the size and composition of fresh asset purchases."

     Eurosystem staff will examine how to tier the deposit rate, which would

shield bank profits from some of the impact of lower rates, as well as "options

for the size and composition of potential new net asset purchases."

     Key interest rates were left unchanged following July's meeting, but

forward guidance was revised to indicate that they will remain at present levels

"or lower" levels at least through the first half of 2020, as the Governing

Council sought to "underline" the extent to which a highly accommodative

monetary stance would be necessary for a "prolonged period of time."

     Both realised and projected inflation rates in the euro zone "have been

persistently below levels that are in line with [the ECB's] aim" of close to but

below 2% in the medium-term, Draghi explained, with the outlook [for growth]

"getting worse and worse in manufacturing."

     "Accordingly, if the medium-term inflation outlook continues to fall short

of its aim, the Governing Council is determined to act, in line with its

commitment to symmetry in the inflation aim."

     Draghi later clarified this statement, adding that "symmetry means that

there is no cap at 2%; [it] means that the Governing Council will act with the

same determination if inflation is above and below 2%."

     There was, Draghi said, "No question about accepting as low an inflation

[rate] as we have today. We don't like what we see. We don't accept permanently

low inflation rates."

     Risks to euro area growth outlook remain tilted to the downside, reflecting

geopolitical uncertainties including protectionism and vulnerabilities in

emerging markets.

     "The lingering of the uncertainty is by itself a materialisation of one of

the risks," Draghi said.

     "Monetary policy has done a lot to support the euro area," he continued.

"But if we continue with this deterioration, fiscal policy will become of the

essence."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

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

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