MNI STATE OF PLAY: No Change Of Direction On ECB's Agenda

By Christian Vits

     FRANKFURT (MNI) - Despite the Governing Council being armed with the

updated economic forecasts from the staff economists, this week's European

Central Bank policy meeting and press conference will likely be a case of 'after

the Lord Mayor's Show' after all the attention focussed on the October meeting. 

     As the bank already unveiled its plan to extend its bond buys and to halve

monthly volumes back in October, mapping out the road ahead, the ECB will

probably see little need to change the wording or the forward guidance on

interest rates.

     Against this background, President Mario Draghi will most likely stick to

his mantra that he will keep interest rates at current levels "well past" the

end of the net asset purchases.

     Of greater interest will be the update of the staff macroeconomic

projections for 2018, with economic growth likely to be and inflation probably

being revised upwards. In September, the ECB forecast growth to average 1.8%,

with inflation expected at 1.2% next year. The staff will also outline forecasts

for 2020 for the first time.

     --HAWKS SQUAWK

     Increase growth forecasts could bring the more hawkish Governing Council

members into the arena, renewing the debate over ending bond purchases after the

current extension period ends in September 2018.

     In recent weeks, the dissenters against the ECB's decision to keep the

asset purchase program open-ended have raised their voices.

     These are namely Bundesbank President Jens Weidmann, Executive Board member

Sabine Lautenschlaeger, Klaas Knot of the Netherland's central bank, Austria's

Ewald Nowotny and Estonia's Ardo Hansson. Executive Board members Yves Mersch

and Benoit Coeure seem to have at least sympathy for the idea.

     Another interesting question in this context is, whether the opposition

camp will grow in coming months, giving them a realistic chance to enforce an

end of the asset purchases.

     Nowotny stressed last month "there is kind of a movement, because more and

more colleagues think that we are in danger that the cost of the expansionary

monetary policy slowly exceeds the benefit."

     Mersch last week struck a similar tone: "While ending the purchase

programme quickly could provoke undue market reactions, we should not overlook

the fact that the longer our asset purchase programme continues, the less

effective the programme and the greater the risks attached to it become," Mersch

said.

     An overly long delay could nourish "a market belief that the exit might be

permanently postponed," he added.

     --REINVESTMENT GUIDANCE?

     Still, it seems unlikely that Draghi would unveil any details of any such

debate. But he might shift the focus to the reinvestments of its APP stock

principal payments.

     The core question here is whether the ECB intends to continue to reinvest

the proceeds of its stock, even when they have started to raise rates, taking a

U.S. Fed-style approach. 

     Another option would be that the Council stops the reinvestments before

executing the first interest rate hike.

     While doubtful it will be forthcoming, any pointer that this debate has

already started and even more so an indication of its possible outcome, could up

the interest value from the pre-Christmas press conference.

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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