MNI SOURCE: ECB To Use Marginal Lending Rate If Economy Slows

--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

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