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ECB set to promise even longer support to charge inflation - Yahoo Finance

* First policy meeting since ECB's strategy review 

  * ECB set to promise more prolonged stimulus 

  * Implications of new strategy for policy still being discussed 

  By Balazs Koranyi and Francesco Canepa 

  FRANKFURT, July 22 (Reuters) - The European Central Bank is all but certain to promise an even longer period of stimulus on Thursday to make good on its commitment to boost inflation but the debate among policymakers is likely to be tense and no new measures will be announced. 

  The Governing Council will meet for the first time since the ECB unveiled a tweaked inflation target earlier this month, the culmination of an 18-month strategic review of its roles in an array of areas from inflation to climate change. 

  Among its conclusions, it said longer periods of ultra-low inflation such as the current one require "especially forceful or persistent" support — an ambiguous formulation that is proving difficult to convert into actual policy. 

  Rate-setters squabbled in early July over how to tailor their policy guidance to fit that commitment and eventually put off making any change in order to maintain unanimous support for the ambitious new strategy document. 

  The same differences are set to resurface on Thursday and conservative policymakers like Bundesbank chief Jens Weidmann are unlikely to relent, so ECB chief Christine Lagarde will either have to compromise or forego her desire for unanimity. 

  This forward guidance is vital as it will signal the ECB's approach to fundamental decisions that must be made at coming meetings, including how to wind down its 1.85 trillion euro pandemic support package and whether to ramp up more traditional support measures as it does so. 

  The core of the debate is whether the ECB should try to push inflation temporarily above its 2% target after a decade of misses, a politically risky exercise for inflation-wary Germans who are already sceptical about the ECB's stimulus efforts. 

  Signalling a potential compromise, ECB board member Isabel Schnabel argued that actual consumer price growth — not just expectations — would need to rise before the ECB tightens policy, and that inflation overshoots would be a sign of patience rather than a goal. 

  "Higher inflation prospects need to be visibly reflected in actual underlying inflation dynamics before they warrant a more fundamental reassessment of the medium-term inflation outlook," Schnabel, who is German, said this month. 

  POLICY MOVES 

  The new guidance will set the stage for a series of decisions, with the first, on the future of the Pandemic Emergency Purchase Programme (PEPP), possibly coming as soon as September. 

  Conservative policymakers argue that the emergency is winding down so the ECB needs to give up its extraordinary powers and revert to more traditional measures, bound by stricter rules and a narrower focus on getting inflation back to target. 

  "We suspect that there will have to be compromises between doves and hawks," Pictet strategist Frederik Ducrozet said. 

  "One possibility is that the PEPP is phased out and wrapped up entirely by March 2022 while the Asset Purchase Programme is expanded by the end of 2021 to compensate for lingering downside risks." 

  Another possible compromise is to maintain some but not all of the flexibility of the emergency bond buys. 

  Under the PEPP, the ECB can buy bonds wherever it deems it necessary and without preset volume quotas. The longer-established APP, however, requires purchases in proportion to the size of each of the 19 euro zone economies, known as the capital key, at pre-set volumes, and excludes heavily-indebted Greece because its credit rating is too low. 

  BNP Paribas economist Luigi Speranza expects some additional flexibility to be carried beyond the pandemic. 

  "This would imply at the very least flexibility on size such as a commitment to purchase 'at least' a certain amount of bonds," he said. 

  "Other factors might be added, such as tolerance for deviations from the capital key or reference to the self-imposed nature of issuer limits and the fact that these could be changed if required." 

  The ECB is also expected to change how it communicates policy, with Lagarde promising "shorter, crisper" statements with less jargon. 

  The ECB announces its policy decision at 1145 GMT, followed by Lagarde's news conference at 1230 GMT. (Reporting by Balazs Koranyi; Editing by Catherine Evans) 

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