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