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ECB on track to claw back stimulus by end-2018 despite gloomy outlook

The bank says its 2.6 trillion euro asset purchase scheme will end this year; interest rates could rise next year

Frankfurt

THE European Central Bank (ECB) kept policy unchanged as expected on Thursday, staying on course to dial down any unprecedented stimulus, even as the growth outlook continues to darken and political turmoil in Italy looms large over the currency bloc.

Having exhausted much of its firepower with years of support, the ECB reaffirmed that its 2.6 trillion euro (S$4.08 trillion) asset purchase scheme will end this year and interest rates could rise after next summer, sticking to a guidance first unveiled in June and repeated at every meeting since.

Acknowledging a weaker recent momentum in the eurozone economy, ECB chief Mario Draghi reeled off what he called a "bunch of uncertainties" related to trade protectionism, emerging markets and financial market volatility.

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"Is this enough of a change to make us change the baseline scenario? The answer is 'No'," he told an ECB news conference to justify its policymakers' decision to maintain their judgment that risks remained "broadly balanced".

The euro ticked higher to US$1.1433 as he spoke, additionally helped by his comment that recent wage increases in the region - a key factor in bringing inflation back to levels seen as normal - did not look like a one-off phenomenon.

"The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding down of our net asset purchases," he said.

"While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Looking ahead, underlying inflation is expected to pick up towards the end of the year and to increase further over the medium term," he added.

Earlier, the Governing Council statement reaffirmed its expectation that key ECB interest rates would remain at their present levels at least "through the summer of 2019". The Frankfurt-based institution said it will buy 15 billion euros of bonds a month through December, with a final decision to end the programme, contingent on incoming information.

Mr Draghi completed the picture by adding there had been no discussion of extending stimulus.

Policymakers speaking in public and private have said the bar for extending the ECB's bond purchase scheme is very high.

With the EU having taken the unprecedented step of rejecting Italy's budget this week, Mr Draghi was quizzed at length about the escalating political fight between Rome and Brussels over the debt-laden country's expansionary budget.

Himself an Italian, Mr Draghi said he was confident compromise would be reached between Brussels and Rome and noted how much the stand-off was already costing Italy because of the rising yield on its government debt.

Asked about the risk that a fall in the value of Italian government bonds could erode the capital positions of some banks that hold them, he said: "I don't have a crystal ball ... These bonds are in the banks' portfolios. They are denting into the capital position of the banks.

"I'm still confident an agreement will be found," Mr Draghi added. REUTERS