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Trend Condition Remains Bearish

By Luke Heighton
     FRANKFURT(MNI) - Recent data has surprised to the downside, but while it is
possible the European Central Bank's January Governing Council meeting could
yield a further tweak to its assessment of risks to the economy, it is unlikely
to produce major policy decisions.
     Here are key points to look for during Thursday's press conference:
     --Minutes of December's monetary policy meeting showed that a case was made
for an assessment of the balance of risks being tilted to the downside, "unless
all shocks affecting the latest figures were considered to be of a purely
temporary nature". While it would take more than recent disappointing data from
France, Germany, Italy and Spain to shift the Governing Council away from the
position that risks remain "broadly balanced", the ECB will be keen to show that
it is not blind to the obvious. For that reason, we might get some variation on
the "fragile and fluid" formulation used to describe Europe's economy in
December, while stressing that the fundamentals have not changed and convergence
with targets remains on course.
     --When the ECB first announced it intended to hold key interest rates "at
least through the summer of 2019", it was widely interpreted as indicating a
rise some time between September and November. Markets now anticipate a first
move no earlier than December, even if some Council members still favour swifter
action, but sources have told MNI that any change to the guidance might not be
forthcoming before the ECB receives macroeconomic forecasts in June.
     --Mario Draghi's response to questions about the systemic effects of Brexit
on Europe's economy is as predictable as the significance of his choice of
neckwear is unknowable. However, the increasing crisis in Westminster may yet
prompt some deviation from the line that Brexit is regrettable but containable,
reflecting the feeling among some central bank governors that a more drawn out,
more politically destabilising Brexit has the potential to create even greater
     --December's meeting also saw a suggestion that the Council should "revisit
the contribution of targeted longer-term refinancing operations to the monetary
policy stance," as predicted by MNI. It remains to be seen whether members can
be convinced that TLTROs are a necessary tool of monetary policy transmission,
or simply something a number of (notably Italian) banks badly want.
Nevertheless, the issue is now out in the open. Tellingly, there seems to have
been little discussion yet on their expected size, duration, or possible
connection to a rise in the deposit rate, so Draghi will almost certainly be
asked about them at the press conference.
     --Core inflation has remained largely flat in recent months, a source of
concern to some Governing Council members, even as others urge greater patience.
The issue is thrown into greater relief given the negative effect of falling oil
prices on headline inflation. As a source told MNI: "It was mentioned in the
discussion on many occasions that it's not clear how fast and to what extent
higher wage rounds in Germany and other places will really show up in core
inflation afterwards. But there has been no extensive analysis up to now beyond
the exchange rate path. So it may be that we'll get some presentation from ECB
staff this time next week on the transmission and development of wages and their
impact on core inflation in particular."
     --December's meeting introduced "chained guidance" - specifying that
redemptions on principal payments on the ECB's existing stock of securities will
continue past the date of the next key interest rate hike. The formulation was
intended to strengthen the impact of enhanced forward guidance overall. Not only
will we see it incorporated into the policy statement, but we can expect it to
be a focal point in the discussion that follows.
--MNI London Bureau; +44 203 865 3829; email:
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