MNI SOURCES: ECB On Hold For Much Of 2020 Despite Hawk Push

     LONDON (MNI) - European Central Bank policy could be on hold for much of

2020, ECB officials told MNI, despite a likely offensive by Governing Council

members who expect incoming President Christine Lagarde to give them more room

to argue their case for early withdrawal of stimulus than her predecessor Mario

Draghi.

     Lagarde, who presides over her first Governing Council on Dec. 12, has told

officials meetings will be longer, in order to allow more time for discussion,

said one source. The Austrian National Bank's Governor Robert Holzmann, in

comments to MNI in late November, called for the asset purchase programme

reintroduced in September's meeting to be rolled back as soon as possible, but

even hawkish officials told MNI any policy reversal could not be undertaken

quickly no matter whether the economy holds up or not.

     "Half a year is probably necessary [before we can start that discussion],

minimum," an official said, "Probably some members who are against APP would

start quite quickly, just to prove the reintroduction was an error. Of course,

others will argue that any improvements are the result of the policy action that

was taken."

     The latest economic data has shown some upward trends, said the official,

adding "but the magnitude of the increase was small."

     ECB guidance is that it expects QE will not end until "shortly before" it

begins raising interest rates.

     "I really would be surprised if there was any change in guidance even

before next summer -- and that isn't to say I do or don't expect it then," said

a second official.

     --EVEN RECOVERY WOULD REQUIRE STIMULUS

     "Policy debate will be very dull for at least six months, and any change

even less likely for a year give or take. Even a modest pick-up will need

careful nurturing with the current expansionary policies."

     Another source, though, noted market expectations of further easing had

dissipated, as global trade tensions and fears of a disorderly Brexit recede.

Hawks might be able to convince Lagarde that if the eurozone is still growing,

even if only at 1%, and if companies are maintaining market share by keeping

down prices but still boosting wages, then it might be possible to reduce

stimulus, the source said. The source went so far as to suggest that the ECB

could justify its inflation performance by looking at prices over a multi-year

timescale.

     "Lagarde will obviously listen to all points of view. She can perhaps

better build a consensus, or should I say 'shape' a consensus, but I don't think

there will be any great change in the policy currently in place -- not for a

while yet," the second official said.

     Another ECB source was dismissive of any upcoming moves to argue for less

stimulus, noting that frequent changes to guidance would undermine credibility.

     "The QE reboot was timely, appropriate and proportionate and I still expect

it to go on for at least one year," the source said, noting that any unwinding

of QE could only be justified by an improvement in the inflation outlook. The

risk persists that medium-to-long-term inflation expectations could de-anchor

from the target range, the source said.

     In the near future, ECB energies will centre on its upcoming review of

monetary policy strategy. The new president also wants to incorporate

consideration of climate change into its forecasting and investment policy, and

says that the eurozone economy needs more investment.

     --INFLATION TARGET FOCUS

     The review will focus on the inflation target, set at "below, but close to,

2% over the medium term" since the last review in 2003. Possible outcomes could

include changing the target to plain 2%, or introducing a range, another

official said, adding that the target might also be left as it is.

     "There are many arguments that it is not necessary to have 2% now and that

it is not necessary to have a point target. The Swiss way is a range target and

they do it quite well," the official said. "I don't think anyone will object to

the process of the strategy review, but the outcome can be this Canadian-style

no need to change anything."

     The official was critical of the way in which Draghi had introduced the

term "symmetry" to describe the inflation target, calling it "not transparent or

professional," and, referring to Lagarde, said: "I don't think she will repeat

his mistake."

     With the ECB's main policy rate negative, Draghi, towards the end of his

tenure, intensified calls for a greater contribution from fiscal policy.

     "Everybody, whether critical or non-critical of the current policy

approach, is looking at alternatives," another official said. "Using instruments

at the margin becomes more and more costly."

     An additional constraint on QE is that the supply of eligible government

bonds could begin to run short within about a year. Any change to rules limiting

purchases to 33% of any country's bonds could also face challenges in Germany's

Constitutional Court.

     An ECB spokesperson declined to comment on the remarks made to MNI by the

sources.

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

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