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Still Looking For Weakness

By Luke Heighton
     FRANKFURT (MNI) - Six months after Mario Draghi announced the tapering of
its asset purchase programme, the ECB's last monetary policy meeting of 2018 is
expected to confirm it will end as planned, but questions regarding future
forward guidance and a fresh round of bank funding may go unanswered.
     Thursday's publication of the Bank's macroeconomic projections for the
eurozone is expected to confirm assessments of a generally decelerating eurozone
economy, but is unlikely to give cause for a major change in strategy at this
juncture.
     Here are main points to look out for:
     APP: It would be a major shock were Draghi not to confirm the end of net
asset purchases at the end of the month, while stressing that monetary policy
remains expansionary, via the planned reinvestment of proceeds from maturing
bonds.
     Reinvestments: Draghi may opt to announce that reinvestments will remain an
open-ended policy tool, if only to reassure markets made jittery by a
combination of trade disputes, Brexit, Italy, and now France. More detail may be
lacking, although we can expect questions concerning the relationship between
future reinvestments and last week's announcement of a new capital key, which
caps purchases of eurozone member states' bonds according to their contributions
to ECB capital.
     Balance of risk: Multiple sources have told MNI that the ECB is
increasingly concerned by signs of slowing growth. Thursday's announcement may
see a slight downgrading of the language from "broadly balanced" to something
more negative, albeit in the context of an economy operating at close to
capacity after 12 months of exceptional growth.
     Forward guidance: MNI sources have also highlighted the possibility that
the ECB's forward guidance policy will come up for discussion at the December
meeting. Some national central bank governors would like a clearer signal on
rate paths while incorporating a more explicit statement regarding the ECB's
readiness to adjust that path in response to changes in the data. Draghi is
highly unlikely to deviate from the established "through the summer of 2019"
language, but it would not be a surprise were the topic to come up.
     TLTROs: A fresh round of targeted longer-term refinancing operations has
been in the air for some time, with a number of banks understood to have
requested them, due to concerns that they will struggle to meet net stable
funding ratio requirements as the due dates for previous TLTRO rounds come
closer. Such a move would undoubtedly meet strong opposition in some central
bank quarters, but there may well be equally strong support from others. Not
thought to have been formally discussed thus far, numerous well-placed
eurosystem sources have spoken on the issue. December's monetary policy meeting
almost certainly won't see an announcement one way or another, but we may - in
Draghi's answers to questions from journalists- be afforded a little more
insight than previously into the possibility of a move in that direction from
early 2019 onwards.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$E$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]