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--A slowdown could keep the overnight lending rate on hold: eurosystem source
     LONDON (MNI) - LONDON (MNI) - The European Central Bank is likely to
respond to any temporary slowdown in eurozone growth or inflation by delaying an
increase in its overnight lending rate to banks, rather than by adjusting its
other key rates or by resorting to more asset purchases, a Eurosystem source
said.
     The ECB is set to begin winding down its asset purchase programme in
October, and expects to conclude it in December, as the Eurozone enjoys solid,
broad-based growth. It says it will keep interest rates at their current levels
through at least the summer of 2019.
     If faced with temporary setbacks, the ECB would look to its marginal
lending facility, currently at 0.25%, rather than to its rate on overnight
deposits, which is at -0.4%, or its main refinancing rate, which is at 0%, the
source said, in exclusive comments to MNI.
     "In the case of a minimum and temporary deviation from inflation and growth
targets, I expect that a rise in the rate on marginal lending facility may be
delayed, and the rate kept at the current level for a longer period of time
compared to the other ones," said the source, adding that ensuring overnight
credit to banks remained paramount in supporting the economy.
     "If a few couple of monthly economic and inflation indicators or data show
ups and downs or variations of little significance, this would justify a delay
in rate hikes. No alarmism here though".
     Only a severe deterioration of the economic outlook could prompt the ECB to
reactivate the asset purchase programme.
     "If the deviation from inflation targets shows a discontinuous, non-gradual
bounce towards deflation, and we end up returning to the same scenario of two
years ago when deflation risks did arise, then a renewed APP might be
inevitable. But only in such circumstances," stressed the source, who expressed
confidence that this remains a farfetched risk.
     The official also reiterated that the APP had become a handy, "legit"
instrument with "full rights" in the ECB's toolbox, and that, at the end of
December, it would be "neatly placed in a drawer, not buried, and always near at
hand".
     Monetary policy must avoid abrupt changes in course in order to ensure
stability, the source said.
     "The Governing Council stands resolute in its strategy, as we have
demonstrated with our gradual communication aimed at smoothly preparing the
ground for the end of APP. There is no rush to exit the programme," the source
said. "But at the same time, there is no rush either to freak out and renew the
APP at the slightest negative economic signal, quickly retracing our steps --
this wouldn't be a gradual approach".
--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com
[TOPICS: M$E$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]