MNI SOURCES: New ECB Guidance Likely To Say Next Change A Cut

     LONDON (MNI) - The European Central Bank is likely to revise its forward

guidance at its meeting on Thursday, making it clearer that the next adjustment

to interest rates will be downwards but holding off any immediate stimulus

moves, ECB officials told MNI.

     Current guidance calls for interest rates "to remain at their present

levels at least through the first half of 2020," but the central bank is keen to

stress its concern about downside risks, particularly at a time when the Federal

Reserve is likely to ease, even if no other major policy action has yet to be

finally decided on in Frankfurt.

     "It could say that rates will stay at their present levels or lower," one

official said. Another said: "We could extend the duration and even hint towards

lower rates, perhaps saying 'rates won't rise in 2020.'"

     Other officials confirmed that a shift was very likely, although additional

stimulus, if decided on, would not come before September.

     "Unless there's an improvement, additional instruments, actions, will be

needed. And we all agree on this, but we're still debating our options: we can

either change forward guidance, reboot QE and further cut rates or combine these

all together," one said.

     Other sources described comments by officials including Bank of France

Governor Francoise Villeroy de Galhau, who said last week that monetary policy

must remain independent of market expectations, as an attempt to temper

expectations following a speech by outgoing ECB President Mario Draghi in Sintra

in June, which led many investors to bet rate cuts could be imminent.

     "It is obviously coordinated," an official said. "This is probably to

decrease expectations and avoid disappointment when no actions are taken in

July."

     --MANUFACTURING WEAK

     While eurozone manufacturing data has been poor, officials are still

watching for spillover into services and domestic demand.

     "We still wish to be driven by real data not the markets. Markets at the

moment are really three steps ahead," another source said.

     While technical discussion on a fresh round of quantitative easing will

continue at committee level, there is still no definitive justification for

pulling the trigger, several officials said. The ECB is considering challenges

to reinitiating asset purchases including limits on its holdings of any one

eurozone country's debt and also, as pointed out by some officials, the likely

limited impact of any fresh QE on boosting economic growth,

     "I would rather bet that the first step, if it happens, will be a rate

cut," rather than a restart of the asset purchase programme (APP) an official

said, adding that there was little backing for a tiered cut in the ECB's deposit

rate, which would shield banks' profits from the full effects of negative

interest rates.

     "Support for tiering is even lower than support for APP or a rate cut," the

official said, although another official disagreed, indicating that tiering

could still occur.

     Talks have also begun on the possibility of changing the wording of the

ECB's inflation target, which currently commits the central bank to seek

inflation below, but close to, 2% over the medium term, one official said.

     "Perhaps we need to make the inflation target phrasing clearer, less vague,

reinforce it. Currently, it's way too subject to interpretation and, in fact,

needs to be reaffirmed each time and we have seen how it can easily generate

confusion over the symmetry," the official said, adding that the idea of

modifying the target so that inflation could be permitted to rise a small amount

above 2% had originated with Finnish central bankers.

     Another official, though, said that a review of the ECB's monetary policy

framework was unlikely before Draghi's nominated successor, Christine Lagarde,

takes over towards the end of the year.

     An ECB spokesman said he could not comment on the remarks by MNI's sources.

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

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