MNI SOURCES: Emerging-Market Fears As ECB Ponders New Guidance

--New Guidance To Remain Extremely Accommodative, Conditional

--Risks Becoming "Bigger And More Downward"

     LONDON (MNI) - The European Central Bank is becoming increasingly concerned

by "bigger and more downward" risks from protectionism and emerging-market

volatility as it begins to discuss how to reassure investors monetary policy

will remain easy beyond its projected rate hike towards the end of summer next

year, ECB sources said.

     While nothing has yet been agreed, the next version of the ECB's guidance

will signal policy will remain extremely accommodative for a long time and will

continue to be conditional on data, an ECB official told MNI.

     Current guidance is for rates to remain at historic lows at least through

the summer of 2019, and that the ECB's asset-purchase programme is anticipated

to end in December.

     This remains valid, with a 10-15 basis point increase in the ECB's deposit

rate a probable first move in September or October next year, but downside risks

are mounting, another ECB source said.

     --RISKS GROWING

     "Risks are becoming bigger and more downward, while in the euro zone the

economy remains resilient and firm," the second source said, adding that, as

things stand, the first rise in the deposit rate may be followed by a pause and

that it might take two or three steps to get it to zero from its current -0.4%.

     "Once the deposit rate is positive, maybe there could be a shift to focus

on the main refinancing rate, once interbank lending is functioning again and

the banks are getting less money for free," the second source said.

     In addition to trade headwinds and a potential slowdown in emerging

economies, Brexit and Italy's growing budget deficit also pose risks, the source

said, noting that higher oil prices could pressure growth and inflation

forecasts in opposite directions.

     Emerging-market turbulence would hit export sectors in countries like

Germany and Italy, said a third ECB official.

     --EMERGING-MARKET SLOWDOWN

     "The global economic slowdown stands at present as the only determining

factor that can potentially negatively impact on the eurozone's economic

performance," the third source said. "Our concerns are rising about an EM

slowdown."

     Discussion on the enhanced guidance, confirmed to MNI by six ECB officials,

is being led by the ECB's chief economist Peter Praet and fellow executive board

member Benoit Coeure. While the matter has yet to be passed to the Governing

Council and is not likely to be agreed and made public for some time, the

guidance should give an indication of ECB thinking as to how it could respond to

events over a one-to-two year horizon, the second source said.

     It will give markets a general direction of travel, but will not mirror the

Federal Reserve's dot plots, which show FOMC members' estimates of rate hikes

over time.

     It could also be used as a signal of policy continuity as the time nears

for ECB President Mario Draghi to step down at the end of October 2019, the

first source said.

     An ECB spokesman said he had no comment on enhanced guidance or downside

risks.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

[TOPICS: M$E$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]