MNI STATE OF PLAY: ECB To Stand Pat, Eye Risks, At Jan Meeting

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

uncertainty.

     --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: jason.webb@marketnews.com

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