MNI SOURCES:Slow Growth May Prompt Future ECB Inflation Debate

     LONDON (MNI) - Amid uncertainty over whether an economic slowdown could

drag into the second half, European Central Bank officials told MNI a discussion

on whether the eurozone's growth potential has turned permanently lower, and

even whether the ECB's inflation target is still appropriate, could be hard to

avoid in the longer term.

     At its March meeting, the ECB cut its growth forecast for 2019 to 1.1%,

from a previous 1.7%, with President Mario Draghi warning that risks were tilted

to the downside, citing the threat of protectionism and vulnerabilities in

emerging markets.

     Officials are divided over whether this forecast is too optimistic,

although many still expect a second-half pick-up even if the central bank

remains ready to respond to any further loss of economic momentum, the ECB

sources said.

     "Although this was quite a substantial revision and some uncertainty

surrounding it, there were also some positive aspects," one source said. "But

there were also significant voices questioning what is really going to drive the

rebound it's hoped will start as early as the summer or autumn."

     Another source said the economy was unusually difficult to forecast.

     "We have quite a substantial probability of a good outcome. Then we have a

perhaps not very large probability of the expected forecasted outcome. And then

we have a larger probability of an even worse outcome than forecasted, so the

average is probably okay, but the distribution of probabilities makes it hard to

call one way or the other," the official said.

     Further downward revisions might be met with an extension of forward

guidance, which currently calls for interest rates to stay at present levels

until at least the end of 2019, sources said.

     --JAPANESE PARALLELS

     The suddenness of the slowdown around the turn of the year surprised

officials and came as an uncomfortable reminder of the eurozone's failure to

return to sustained strong growth, a subject which had already prompted

unofficial discussions within the ECB over the uncomfortable parallels with

Japan's decades of stagnation.

     "It's not a new topic [among Governing Council members]. People have been

watching what's going on in Japan for quite some time now," one source said.

Another added that arriving at the conclusion that the eurozone's growth

capacity had ratcheted permanently lower would quickly lead to consideration of

whether the ECB's target of inflation below, but close to, 2% over the medium

term is still appropriate. But, as inflation is currently well below that, with

the central bank only expecting prices to rise by 1.2% in 2019 and to fall short

of the target for at least the two subsequent years, any such debate would

currently be impossible, for fear of damaging the credibility of monetary

policy.

     "This debate crops up again and again but there is not a real discussion in

the Governing Council on it at the moment. It really boils down to a debate on

the inflation rate - but we have to get to 2% before we can change it, otherwise

it looks like we are failing to deliver on our mandate and so moving the

goalposts," a source said.

     "But at some point, yes, the ECB has to have that discussion."

     Another official pointed out that any future debate on the inflation target

would not necessarily be one-sided, and that some Governing Council members

might even argue the measure should be raised, in order to limit the possibility

that rates might ever have to fall close to the zero bound.

     "I don't think that makes sense. When you can't even lift inflation up to

2%, what would it mean to increase it to 4%?" the source said. "The range of

opinion is so broad that there is unlikely to be any consensus around the issue

any time soon."

     An ECB spokesman, contacted by MNI, declined to comment.

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

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