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Needle Still Points North

     LONDON (MNI) - The European Central Bank is likely to keep its policy
settings unchanged for at least the rest of the year, as new President Christine
Lagarde faces the immediate task of soothing tensions within an openly divided
Governing Council, ECB sources told MNI.
     Outgoing President Mario Draghi's final meeting on Thursday will be
uneventful compared to September's, when the decision to cut the deposit rate by
10 basis points to -0.5% and relaunch quantitative easing at the rate of E20
billion a month came despite opposition from the Dutch, German, Austrian and
French central banks.
     Recent economic data has shown signs of stabilising, albeit at low levels,
one source said, adding that updated staff forecasts in December would probably
be little worse than September's. It is unlikely that Lagarde would attempt to
push through any further policy changes at her first meeting in December, the
source said.
     "Her management skills at holding coalitions together could be very much a
needed skill in coming months. Perhaps some dissenting governors have enjoyed
the freedom to speak and it has liberated them to be more vocal in future. I am
sure she would like to curb any such instincts to smooth her early months.
     In contrast to September's discord, the ECB's October meeting will be a
"valedictory" gathering for Draghi, the source told MNI, adding "It is probably
a time to let the disagreements from last month settle a little."
     Another source agreed.
     "I wouldn't expect any concrete discussion on any potential next steps
until early next year, we need to take stock of this year's last quarters to
properly weigh how things are going," the source said.
     "I'm quite confident in saying nothing more will happen this year."
     --LIMITS TO BOND BUYING
     Draghi has upped calls for eurozone states to increase fiscal spending,
arguing that monetary policy alone will be insufficient to provide the support
the economy needs. His successor is likely to continue that push.
     Another matter on which Lagarde, a trained lawyer, will be able to focus
her skills will be whether the ECB could further raise limits on its purchases
of individual countries' sovereign bonds, currently capped at no more than one
third of outstanding stock. Without raising these limits, or else deviating from
the ECB's capital key which proportions bond purchases according to eurozone
member states' shares of its capital, the central bank's QE programme could run
out of securities to purchase within about a year, sources have told MNI.
     Bundesbank President Jens Weidmann has already warned that he would oppose
any attempts to lift the limits. An additional complication could come from a
German constitutional court ruling on ECB bond purchases, due in the next few
months, another ECB source said, adding that an anti-QE ruling could not be
completely ruled out.
     But one of the sources was sanguine: "I don't think the German
constitutional court ruling will be an issue. Last year the European Court of
Justice ruled that the ECB's bond purchasing program was legit and the ECB was
not overstepping its remit."
     An ECB spokesman said he could not comment on the sources' remarks to MNI.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
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