MNI SOURCES: ECB Could Streamline Guidance In Coming Months

--ECB Could Cut "Summer", Emphasise "As Long As Necessary"

     LONDON (MNI) - The European Central Bank could streamline its forward

guidance to simply emphasise that interest rates will remain unchanged for "as

long as necessary" once it drops its reference to "through the summer of 2019"

at some point over the next few months, Eurosystem sources told MNI.

     Whilst sources saw a lower probability of a change to wording at the ECB's

March meeting, the "summer" formulation introduced in June 2018 will lose its

relevance before the departure of the bank's president, Mario Draghi, at the end

of October. With an economic slowdown probably having taken any possibility of a

rate hike this year off the table, two sources said removing the time element

would be the easiest approach for the central bank.

     Such a move could come in June, one source said, noting that waiting until

then would have the advantage of removing sources of uncertainty including that

of the outcome of May's European parliamentary elections.

     "It's difficult to imagine a change in forward guidance in March," a third

eurosystem source said. "Of course they may discuss it, and there could be a

decision to say, 'at the earliest next year', but I'm not sure if they as a

whole are willing to change it or see a need to change it at the moment."

     "First I think the idea would be to shift the end date until after the date

the new president comes in. That's perhaps most important. And the second would

be to shift it to early 2020."

     The mood in the Governing Council has turned more dovish as economic data

has deteriorated, with Dutch central bank chief Klaas Knot, who last year

anticipated discussions over rate hikes in 2019, calling earlier in February for

the ECB to pause before any attempt to tighten policy.

     "The overall mood at the last meeting was that it was important not to

introduce any more expansionary measures, rather than pushing back against

keeping interest rates as they are," the third source said.

     --AUTO TARIFF FEARS

     Four eurosystem sources pointed to Germany's performance as being at the

heart of concerns over the eurozone economy, which are likely to lead to

downgrades to ECB growth forecasts to be released at its next meeting. Whilst

China's slowing economy is partly to blame for weakening German exports, there

are other risks, including the danger that the U.S. could slap tariffs on EU car

exports.

     "Germany's problems are closely connected with China," a fourth official

said. "But the question is whether the problem is more than just the proportion

of its exports destined for China. Even if the U.S.-China trade dispute eases,

Trump's focus will probably turn to Europe. So there will be relief on one

front, but the opening of another front."

     With markets already pricing in steady rates in 2019, many Governing

Council members argue monetary conditions are easing without any need for the

ECB to act further.

     "We must admit that recent negative data has been a surprise, taking us all

aback. Growth forecasts will almost certainly be cut in March, at least for this

year; to what extent, will depend on last-minute data," a fifth source said.

     "If, and only if, the downward revision will be significant, the forward

guidance could be slightly tweaked, with a greater emphasis on rates staying at

current levels for 'as long as necessary,'" the source said. "But even if the

forward guidance is not altered, this does not mean that the Governing Council

will not react anyway if things really go south. There is headroom for

intervention beyond the guidance."

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

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