MNI SOURCES:Pressure On "Balanced Risks" As Data Weighs On ECB

--Eurosystem Officials Say Growth Outlook Deteriorating

--Risks Tilting More To Downside

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

of slowing growth, Eurosystem sources said, putting pressure on the ECB's

assessment that economic risks are "broadly balanced" even as it is set to end

its bond buying programme in December.

     The first quarterly contraction in German gross domestic product since the

beginning of 2015 and slowing purchasing manager data could be reflected in

lower ECB growth forecasts next month but will not prevent it from moving

further towards normalising monetary policy.

     "I wouldn't be surprised if there isn't a downgrading on both 2018 and 2019

growth," one Eurosystem source told MNI, referring to the December economic

forecasts assembled by ECB staff and national central banks. Inflation forecasts

might be revised slightly higher, two sources said, noting that rising wages

were feeding through to inflation.

     The Dec. 13 meeting might see some change to the "broadly balanced"

language used to describe risks to the eurozone economy in President Mario

Draghi's introductory statement to his most recent press conference in October,

another source said. Draghi retained the language in a speech Nov. 16, and the

Governing Council's decision would take more recent data into account, as well

as the ECB forecasts.

     "For Europe overall the risks are tilted downwards ... As opposed to the

spring, when I was saying that the risks are balanced," a third official said,

mentioning the dangers of a slowdown in China or the U.S., which are locked in a

trade dispute.

     --REINVESTMENT, ENHANCED GUIDANCE

     While the central bank is due to decide how it will reinvest proceeds of

expiring bonds within its existing portfolio, some of the discussion at the

December meeting could focus on the shape of the ECB's future enhanced forward

guidance, to be put in place some time next year.

     Current guidance is for rates to stay at current levels "through the summer

of 2019," but weakening economic indicators are making the bank keener to

reassure investors policy will remain extremely accommodative even after the end

of asset purchases.

     One possibility is that the ECB will offer enhanced forward guidance on

successive dates in the short-to-medium term on which it expects to put up

rates, but subject to incoming data and without specifying the size of the hike,

a Eurosystem official said.

     Despite comments by Dutch central banker Klaas Knot, who indicated that

rates could rise earlier than the summer, any hike is unlikely until the last

three months of next year, and only so long as data does not weaken any further,

an official said.

     The way the ECB decides to reinvest its expiring bonds could also help it

respond to potential economic difficulties. Its chief economist, Peter Praet,

said in a speech on Nov. 13 that the bank could, if it wanted to reduce

longer-term interest rates, purchase maturities further out in the curve.

     --CAPITAL KEY

     The ECB is likely to continue to apply the same weightings for its

purchases of sovereign bonds as indicated by its current capital key - which

measures different nations' contributions to ECB capital, a Eurosystem source

said, confirming comments from other ECB officials to MNI. An updated capital

key, with a lower weighting for Italy, is due, but will come when the ECB has

already struggled to find enough bonds to buy, and is unlikely to be applied to

reinvestments.

     Only an extraordinary economic setback could lead the ECB to continue its

bond purchases after their anticipated end in December. But the declining

outlook for growth, together with Italy's budget dispute and the prospect that

some European banks might find it tough to repay targetted longer-term

refinancing operations when they expire in 2020 and 2021, has prompted the ECB

to look at other monetary tools.

     These include possible fresh TLTROs, several sources said, however they

would be unlikely to be announced in December. One official said that there

would probably be no news on TLTROs before the spring, and that they could take

the form of three successive programmes, with shorter maturities. Some in the

ECB, though, are more circumspect about deploying TLTROs, arguing that their

proper role is a crisis-fighting one.

     The ECB has said that it could, if necessary, return to previously-used

tools. While not on the agenda currently, these could include multi-year

fixed-rate longer-term refinancing operations (LTROs) with full allotments.

     "A request for new TLTROs was raised by some EU banks, concerned by

liquidity shocks after the end of the asset purchase programme. But this can be

done in several other ways, too. There are different tools we can use to ensure

liquidity levels," the source said. "Fixed rate full allotments are another

viable option."

     The ECB, when contacted by MNI about the issues raised in this article,

said it did not respond to comments from sources.

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

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