MNI SOURCES: China, Other Risks Could Push ECB Hike To 2020

--ECB Increasingly Concerned by China Slowdown

--Some Sources Say Rates Guidance Could Be Pushed Back

--Any Guidance Move Could Take Months

     LONDON (MNI) - The European Central Bank is increasingly concerned by

slowing growth in China as its trade war with the U.S. bites, leading some

officials contacted by MNI to speculate that an interest rate hike that had been

widely anticipated for the end of 2019 might be more likely the following year,

even if any change in guidance might not come for up to six months.

     "It's quite probable that for Q4 2018 and Q1 2019 the incoming data will be

even worse than expected," one senior eurosystem official said, adding that much

depended on whether the U.S. and China are able to defuse their trade dispute.

     "There are some rumours that the outcome of the U.S.-China negotiations

could be positive, so maybe it is realistic that the expected interest [rate

increase] will actually occur at the end of 2019, otherwise it will be pushed

back," the official said.

     Market perceptions of the likelihood of a hike have already shifted to

early 2020, as eurozone growth has slid to four-year lows, with manufacturing

particularly hard hit. ECB guidance is that rates will remain unchanged at least

"through the summer" of 2019, and several officials, pointing to fears the

economic slowdown is no blip, told MNI that this merely represents the earliest

point for an increase. Another, though, noted that the ECB would be reluctant to

downgrade its guidance too quickly, for fear of sapping investor confidence.

     The effect of rising U.S. interest rates on emerging markets with dollar

debt, a disorderly Brexit, and the danger of another flare-up of Italy's fiscal

concerns add to the list of risks.

     --LONG TUNNEL

     Another eurosystem source said officials were "extremely worried" by data

from small- and medium-sized enterprises.

     "It is starting to look like a never-ending story. We've been talking for

months about a temporary slowdown, but is it really so, and what if it's more

severe? So far there has been no trend reversal, we're not seeing the end of the

tunnel," the official said.

     "Market expectations already foresee a delay, shifting the first rate hike

to 2020, so let's put it this way: this would be comfortably within the range of

possibilities for the Governing Council."

     A third eurozone source agreed, saying another two quarters of declining

growth might force the ECB to push back expectations for a hike.

     Not all within the ECB, however, would be comfortable with delaying a hike,

another official at the central bank said.

     "There are certainly some people who are OK with that, others maybe not,"

the official said. "It depends what we see in Q1."

     If a deeper slowdown is confirmed, the ECB would likely respond by

adjusting guidance, rather than by any return to unconventional measures, the

official said, adding that it would be possible to wait as long as June before

doing this.

     "We are seeing a slowdown almost everywhere, in the core and periphery.

This could spread and hit confidence. We don't want to drive insecurity and

investor confidence down from our side," the official said, adding that growth

next year could be at or above potential: "It is true that indicators are not

great, but there is no recession looming."

     A eurosystem source pointed to a connection between ECB Governing Council's

decision last week to keep open the duration of reinvestments of the stock of

asset purchases and the potential timing of the first rate hike, arguing that

the relaxation in the timescale for the former implies more scope to delay the

latter. This source thought it "far from being incoherent" that the Governing

Council would move into line with market expectations in permitting the rate

hike to slide into 2020.

     Other measures, including a possible fresh round of targeted longer-term

refinancing operations, which would help some banks meet net stable funding

requirements as older TLTROs approach maturity, are under consideration, but a

decision may still be some months away, officials said.

     --CHINA SYNDROME

     Several stressed the damage to eurozone growth by a slowing China.

     "China is even more important than some perhaps realised, in terms of the

slowdown of the Chinese economy and the expected drop in demand. I think that's

the strongest drag on Europe's economy," the senior Eurosystem official said.

     "If the external situation were repaired in a rapid way, then I would say

there are no special internal drags on eurozone growth. Internal restrictions

and lack of confidence would be less of a problem if external circumstances

weren't as they are."

     The ECB adjusted its assessment of risks to the eurozone economy at its

December meeting, even as it confirmed an end to net asset purchases. It

repeated its judgement that risks were "broadly balanced," but addeding that

"the balance of risks is moving to the downside," due to protectionism,

emerging-market vulnerability, and financial market volatility.

     An ECB spokesman declined to comment to MNI.

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

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