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MNI (London)
--No Change In Guidance Expected Until March
--Governing Council Remains Sanguine Over Exchange Rate
By Christian Vits
     FRANKFURT (MNI) - Despite some chatter in recent days suggesting the
European Central Bank Governing Council could change its guidance this week,
Thursday's policy meeting likely won't be as earth-shattering as expected by
some observers.
     Financial markets took notice of a sentence in the ECB's latest minutes,
published on Jan 11, stating that "the language pertaining to various dimensions
of the monetary policy stance and forward guidance could be revisited early in
the coming year".
     In reaction, some ECB watchers brought forward their calls on the timing of
the first interest rate hike and forecast a change of the central bank's
wording. But it might be premature to bet on any significant changes this week.
     "We haven't seen much fundamental moves on the inflation side, so we have
to wait for the new projections [on economic growth and inflation] in March," a
senior Eurosystem source told Market News last week. "Before this you will only
see minor adjustments -- if at all."
     Another argument against greater change this time may be the turmoil in
financial markets itself. ECB President Mario Draghi hates nothing more than
tension in the markets.
     As a consequence, he might be more inclined to reassure over the current
stance of the Governing Council, rather than coming up with new insights on the
course of policy.
     What's more, the fundamental decisions concerning October bond buying are
not too far away. Any bigger alterations could be judged to be a deviation from
the ECB's steady-hand policy.
     In general, "the resistance to a change in the wording with respect to the
forward guidance has been remarkably strong from [ECB President Mario] Draghi
and [Vice President Vitor] Constancio," the source said.
     Still, discussions about the positioning of the ECB are ongoing. One of the
topics certainly is the debate over an end-date for the asset purchase program.
     But this discussion seems to have ended, in the sense that it is more or
less agreed to exit this unconventional measure in 2018. It doesn't matter too
much, in either timing or additional volume, whether it ends in September or
     "There is a palpable shift of sentiment in the Council with respect to the
end of the asset purchase program," the source noted. "I would not expect too
much fighting about an extension to December."
     --APP EXIT
     With regard to the timing of a final exit from the APP he added: "I would
be pretty surprised, if we did not end the program at the end of the year -- at
the latest."
     On the other hand, there is no urgent need for the Council to give away any
option to react on surprising developments -- another argument to stay rather
calm this week.
     At the same time, the wording, the forward guidance, has to change, at the
latest when the Council communicates an end of the bond buys, most likely in
June, when another set of fresh projections on economic growth and inflation are
     "When the asset purchases end, you will have to tie the interest outlook to
something else," another Eurosystem source told Market News.
     "Otherwise, you only have the formulation 'well beyond' the end of the bond
buys," he added. "One has to go a step further, saying, that we will tie the
interest rate outlook to the speed how fast inflation rates move to 2 percent."
     Instead, the hottest topic might be the recent appreciation of the euro
against the dollar. The single currency has gained almost 5% against the
greenback in the past three months, which could trigger questions in the
follow-up press conference after the meeting.
     The doves on the ECB Governing Council may use the euro's jump against the
dollar to argue for caution over any change in language and even the fundamental
bias towards a normalisation of monetary policy.
     On the other hand, MNI's sources said monetary officials are rather relaxed
about the euro exchange rate, with no need to react to currency movements.
     Given this background, there still seems much to be discussed -- but likely
not to be communicated this week.
--MNI Frankfurt Bureau; +49 69 97782671; email:
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MNI London Bureau | +44 203-865-3812 |