MNI SOURCES: ECB Dec Forecasts Stand, Signs Of Discord Ahead

The European Central Bank's December staff growth and inflation projections remain in play despite surging Covid infections and fresh lockdowns, eurosystem sources told MNI, though one official's concerns over the length of time government spreads could be artificially compressed even as credit standards tighten may point to potential disagreements ahead.

While no monetary policy decisions are likely at Thursday's Governing Council meeting, officials expressed continued unease over the euro exchange rate and mentioned discussions over when to wind down the ECB's Pandemic Emergency Purchase Programme as a potential source of future friction.

Credit growth also "looks better than it really is," one senior policymaker told MNI, speaking before the release of the January 2020 bank lending survey which reported tightening credit standards coupled with declining loan demand in key sectors.

A build-up in lending towards spring 2020 was followed by much smaller flows over the summer, the official said, adding: "So in the next year, we will see quite a correction in terms of the base effects. And this lending channel, of course, is critical to the economy."

CLOSING SPREADS

An uneven, K-shaped recovery across the eurozone could be "the next big monetary challenge," a second official said, though it was not impossible the ECB could begin discussions about the timing for winding down PEPP as early as the spring, in a bid to preserve firepower.

Another official said the ECB could not permit government financing costs to remain artificially low indefinitely.

"What Christine [Lagarde] said earlier in the year - 'We are not here to close spreads' - of course that was inappropriate at that time," the first official added. "But at some point it also means that we will not keep these spreads as they currently are. One should not. But let's deal with the current problem, and about the next steps let's talk later."

Other sources pointed to the potential for future communications hiccoughs, particularly as Italy heads into renewed political turbulence. Most, though, insisted that the end of stimulus was nowhere in sight.

"I don't think that today or even the first half of next year will be the right time to start discussions" about any PEPP tapering, said one.

Several officials were also doubtful of calls to be more specific about the "favourable financing conditions" pursued by the ECB.

"Maintaining easy financing conditions is a phrase we can all get behind. And it probably has enough ambiguity to hold a line across a spectrum of positions," one official said.

EXCHANGE RATE

December's growth and inflation projections remain valid, in line with comments by President Lagarde last week, officials said. Council members also show "only limited willingness to make a big further step, unless things turn really much worse," one added.

"Q4 with lockdowns and Q1 are going to be very difficult, as we expected," another official said. "Q2 again will be mixed at best and the bulk of the pickup will be in H2. From that point, there is no difference to December. Maybe a little worse in size, but not so much as to affect where we saw the direction."

"We expect to get the pandemic under control in spring and that it will be over in 2022," another source said, with exports and investments growing at a rapid pace thereafter, alongside a gradual resumption of consumption and an only partial reversal of the greater propensity to save observed since the pandemic began.

The euro's level against a basket of currencies, will "undoubtedly be a focus in both the statement and the press conference," even if the "big picture" is no different to that in December, an official said.

Another predicted a "stocktaking" announcement on the status of the ECB's strategic review could be made as soon as February. Discussions are likely to include a clearer definition of what most officials agree is the bank's symmetrical inflation target.