MNI SOURCES: ECB In Extended Pause, Turns To Inflation Target

     LONDON (MNI) - The European Central Bank will continue what is likely to be

a protracted period of unchanged policy at its Jan. 23 meeting, as new President

Christine Lagarde moves to heal divisions left by September's easing measures,

ECB sources told MNI, adding that the ECB was likely to redefine its inflation

target as part of its upcoming policy review.

     Some prominent central bank governors have already weighed in with

preferences for replacing the ECB's existing target of below, but close to, 2%

over the medium term. Bank of France Governor Francois Villeroy de Galhau has

said the target should be symmetrical, while Dutch central bank chief Klass Knot

called for the ECB to define a range around its central aim, in line with a

recommendation by former Executive Board member Benoit Coeure.

     Coeure, at a farewell event in December, called for the ECB to clarify that

its objective is a medium-term one, and to communicate a range of acceptable

inflation outcomes. His comments took some by surprise, a former ECB official

told MNI, calling the remarks "almost market-sensitive", because they repeated

advice given to the Governing Council by the ECB's economics department.

     Coeure made clear he was expressing a personal opinion in his speech.

     With the review only set to be officially announced at the meeting, it is

still early days, officials cautioned.

     "It is too early to say there is agreement on adopting a point target

around 2% just because everyone who is speaking publicly is agreeing with that,"

one official said, although also noting that some areas of agreement do seem

clear, and that "even the Bundesbank has not suggested a lower target."

     "There is an argument for a clear and exact target and an argument about

ranges but maybe there won't even be a numerical range," the official said.

     "The message would be that the further we move away from the target in

either direction then we have to react so at 2.5% we would react, at 2.1% not.

     "That would be a bit of a difference with the Bundesbank, which would react

as soon as it was above 2%."

     --HOUSING COSTS

     Another official told MNI that it was possible that the inflation metric

used for the target could itself be updated, perhaps to include housing costs.

     "I would bet that a 2% symmetric target without a range - not with a range

- is something that will come out of the review," the source said, although

adding a caveat: "If we had a range, then the only possible, sensible

arrangement would be 1 percentage point up or down - all other measures are

probably too narrow."

     A third official, also in favour of an explicitly symmetrical approach to

the inflation target, cautioned that the argument had a long way to go.

     "There will be lots of talk and comment in coming months as different

people posit positions and policy forums discuss the matter. But let's be clear:

at the moment these are discussion points are a long way from any answers to the

questions. In fact, we probably haven't fully clarified the precision of the

questions yet."

     Former President Mario Draghi, and Lagarde, have said that they already

regard the inflation target to be symmetrical, although not all ECB officials

accept this.

     With officials anticipating that the ECB is unlikely to adjust its policy

for some time following September's moves, Lagarde's own views on monetary

policy remain to be clearly defined.

     "At the moment, we are in a very consensual phase, despite the September

differences. That policy won't be changing any time soon and the policy

framework review is starting," a source said. "That gives her plenty of latitude

and leeway for a while - an extended honeymoon period if you like."

     Another source agreed: "Some governors probably hope there will be a chance

to end [the asset purchases programme] again, some of the doves probably hope

that even further rate cuts can occur, but the existing set of measures is some

kind of status quo which fits quite well to the majority of Governing Council

members."

     Officials have generally liked what they seen of Lagarde so far, despite

scepticism regarding her calls for the ECB to take account of environmental

objectives in its policies, the source said. But some officials have also noted

that a relatively inexperienced Executive Board might find itself sore tested in

the event of a crisis.

     "There is broad concern, or even consensus, that the decisiveness of this

set-up wouldn't be so visible or obvious," the source said.

     An ECB spokesman declined to comment on what the sources told MNI.

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

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