MNI SOURCES: ECB May Clarify APP End; No Hike Date Debate Yet

     LONDON (MNI) - Greater clarity over the near certain year-end termination

of asset purchases, while reiterating a commitment to keep interest rates low

and a loose monetary stance for a prolonged period, dependant upon the

eurozone's outlook, will be the likely outcome of the European Central Bank's

July 26 Governing Council meeting, sources familiar with the agenda have told

MNI.

     It will also be an opportunity to reassure financial markets by stressing

that the ECB will be flexible in changing strategy should the inflation target

derail or economic conditions significantly worsen, MNI understands. 

     Coming months will be relatively low-profile for ECB policymakers, as no

debate has officially started within the council over when exactly a first rate

hike could occur, with one Eurosystem source telling MNI that "the decision is

still one to be made, and it will be taken only once we come to that bridge, but

in any case not before next summer". 

     Another senior central bank source has said he feels markets are, currently

at least, correctly pricing a first hike in rates for "around October 2019",

although noting that best practice is not to tie ones hands at too early a

stage.

--APP CLARITY

     The ECB appears to have two main aims for the upcoming Council meeting. One

is to give some clarity over the APP after December, when the 3-month tapering

announced in June comes to an end. The other will be leaving the door open to a

somewhat "flexible reading" of when the first rate hike may come, to help soothe

markets, added the first official.

     "The APP is set to terminate, this is certain. Of course, the focus has now

shifted to what will happen post-APP and to interest rates. But there is no

reason for any kind of alarm as monetary conditions are bound to remain

accommodative for an extended period and our strategy will be flexible,"

stressed the first official. 

     Alongside, the ECB will continue to reassure "it stands ready to adjust and

review all its instruments as appropriate to ensure that inflation continues to

move towards its aim in a sustained manner," the source said. 

--CONTINUED LOOSE POLICY

     The whole Governing Council is unanimous over the commitment to maintain a

loose monetary policy stance, dependant upon economic conditions, and also to

readily intervene and change tactics in the case of a significant worsening of

such conditions, said the Eurosystem source.

     And despite an overall upbeat assessment of the regional economy, there is

certainly a concern amongst sources that conditions could worsen, particularly

if global trade disputes deteriorate further.

--APP END TAKEN IN STRIDE

     The Eurosystem source recalled how a year ago, the big question that

haunted markets and governments alike was: what would happen once the asset

purchases come to an end.

     "Time and prudence have proven us right," the first official said. "Not

only has there been no earth-shattering repercussions with the June APP-end

announcement, but rates on new long-term bond issuances have decreased and

financial conditions across the bloc have improved". 

     The ECB's confidence, despite the eurozone's economic slowdown in recent

months, is underpinned by the "ammunition" of low rates still being fully

deployed. 

     The second half of the year will thus pave way to a transition phase which

will see the end of APP "counterbalanced" by continued low interest rates used

as a sort of parachute, helping ease the switch to policy normalisation. 

     The summer break will give ECB policymakers some slack from the hectic

activity of recent months and allow them to properly weigh their "strategy mix"

of firmness and flexibility to fully meet their inflation target.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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