MNI SOURCE: ECB To Gradually Amend Guidance Ahead APP End

--Source Does Not Foresee Forward Guidance Revision At March Meeting

--ECB Trying To Avoid 'Wording Deadlock' Trap: Source

--Other Sources Say March Guidance Line Issue Still Open

     LONDON (MNI) - The European Central Bank is likely to "gradually" revisit

its communication in the run-up to the end of the asset purchase program (APP)

in September, rather than issue a significant change at the March 8 meeting, a

Eurosystem source told MNI.

     Other sources in the Eurosystem have indicated to MNI that the central

issue of forward guidance is still open and the formal line has yet to be agreed

for next month's Governing Council gathering.

     But the initial source told MNI there is little point in amending guidance

now: "The fact that our confidence in reaching set inflation targets in the

short run is strengthening doesn't mean that the goal is around the corner. So

there's no point in altering the wording of our statement nor updating our

forward guidance," the source said.

     Growth consolidation and a recent modest uptick in price levels across the

bloc may raise hopes but do not automatically translate into a change of

communication, this source argued. The Governing Council's March monetary policy

meeting will therefore be likely to leave its forward guidance unchanged, as the

current eurozone economy has certainly improved but the overall outlook hasn't

much changed.

     "We need to look at this from a different perspective," the source

suggested. "Considering how susceptible markets are to our wording, the fact

that our forward guidance hasn't changed but has stayed aligned to our

expectations is a positive element that boosts confidence." 

     The ECB is also trying to avoid being "trapped in the wording deadlock,"

the source argued. "In changing one or two words that could trigger market

frenzy ... the Governing Council wants to avoid being stuck in such quick sand

and believes this whole wording obsession needs be over".

     However, according to the source, there will be a gradual evolution in the

ECB's communication between now and September when the APP is currently expected

to terminate.

     "On the Governing Council there are different views between members who

would like to communicate the end before, and others later, but right now the

timing is not an issue of discussion," added the source.

     --VICTORY CLAIM PREMATURE

     The source also warned against hailing victory over deflationary risks

ahead of time.

     "Although it's true that two years have passed since significant

deflationary risks were averted and there have been timid positive signals that

have boosted our confidence, the path ahead is still narrow," the source said.

     Nonetheless, "the absence of bad news is the proof that we are moving

towards a more probable, yet progressive and gradual, inflation profile

increase," the source added.

     The ECB's underlying optimism, however, was not linked to any expectation

of an acceleration in the inflation dynamics. "Most certainly we might see in

September that we have reached our target and all is well. But for the time

being we are sticking to a prudent approach that sees inflation remain weak,"

the source argued.

--LIQUIDITY REMAINS

     "The goal in the short run is to keep our sequencing unchanged. As of now,

the APP will last until September, alongside the current level of rates. Only

after the end of APP could rates be revisited, but at a much later stage," the

source continued.

     The key message the ECB was trying to get through at present, the source

said, is that abundant liquidity support to the banking system (i.e. fixed rate,

full allotment operations) will not end with the APP, but will be guaranteed

until at least the end of 2019.

     Regarding the forward guidance, the exact choice of wording serves the

purpose of being flexible according to the outlook.

     "We have said over and over again that we expect to keep interest rates at

their present levels well past the horizon of the net asset purchases. Well past

implies there is no set gap-time sequencing between the end of the APP and a

potential rate hike," said the source.

     This vagueness is intentional because any decision to raise rates will

depend upon the "circumstances" of the eurozone's economy at that given moment.

     "It is crucial that any rate increase does not occur before inflationary

and economic improvements have really consolidated," the source insisted.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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