MNI STATE OF PLAY: ECB On Hold Over Summer; To Eye Trade War

--Following June Taper Announcement, Outlook Commentary To Be Key

By Luke Heighton

     LONDON (MNI) - European Central Bank President Mario Draghi is not expected

to spring any surprise policy announcements next Thursday, when he delivers his

first monetary policy statement since announcing the tapering of its asset

purchase programme (APP) last month.

     The Governing Council signalled its intention in June to bring an end to

the policy that currently sees it pump E30 billion into the Eurozone economy

each month, with net purchases slowing to E15 billion for each of the final

three months of the year, before, they hope, finally ending -- a move seen as a

nod to the hawks on the Governing Council.

     The decision to end APP before the start of 2019 was offset by the Bank's

ongoing commitment to holding interest rates at their current level at least

through the summer of 2019 -- a move no doubt designed to appease the Council's

more dovish members.

     Central bank watchers aren't expecting an immediate response to headline

inflation in the Euro area, which, according to Eurostat's flash estimate, hit

2% in June. This was driven by a 1.9% increase in energy costs (mostly oil)

compared with the previous month, and leading to what Draghi called a "notable"

upward adjustment to the annual HICP projection of 1.7% for 2018, 2019 and 2020.

     --THROUGH THE SUMMER

     Draghi is expected to stick to the line that rates will remain unchanged

"at least through the summer of 2019, and in any case for as long as necessary",

in order to keep inflation at the target level of below, but close to, 2% in the

medium term.

     Asked in June whether "through the summer" might include the possibility of

a rise in September, Draghi replied: "If it had meant September, we would have

said September" - raising the possibility that a rate hike could be the first

item on the agenda for his successor after the Italian steps down in October

next year.

     Of more immediate concern is the ECB's response -- if any -- to heightened

financial market volatility and, more pressingly, ongoing uncertainty over the

hot political issue of the day, and arguably the greatest threat to Eurozone

growth: protectionism.

     In his last statement, Draghi referred to quarterly GDP growth having

"moderated" from 0.7% to a "still high" 0.4%. This fall was attributed in large

part to 2017's "extraordinary", and probably unrepeatable, pickup in exports,

compounded by an "undeniable increase in uncertainty", most of them

"geopolitical", that may yet impinge on the previous pattern of "consistent,

ongoing, solid and broad-based economic growth", strengthening domestic cost

pressures and rising wages.

     --TRADE WAR FEARS

     Indeed, MNI sources indicate there will be no immediate policy impact from

the ongoing threat of large-scale trade disputes with the U.S. Yet Draghi is

understood to have intervened to warn leaders at the recent European Council

Summit in Brussels that the trade dispute has the potential to wreak havoc on

both the Eurozone and the wider European economy.

     President Trump's remarks on the EU during his recent trips to Germany, the

UK and Finland, will hardly have boosted confidence across the single currency

bloc, while further trade retaliation -- either in the form of across-the-board

tariff hikes, or industry-specific measures aimed at European auto manufacturers

-- may prompt a change in language, if not in action.

     The bond markets will be looking (probably more in hope than expectation)

for some indication as what the Bank intends to do with its QE reinvestments,

and, away from monetary policy, we can expect Draghi to repeat calls for the

speedier and more effective implementation of structural and fiscal reforms at

national level, alongside the deepening of Euro area ties through the decisive

implementation of the banking and capital markets union.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

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