MNI STATE OF PLAY: ECB To End Asset Purchases As Growth Eases

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

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