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ECB sticks two stimulus exit despite bunch of uncertainties

FRANKFURT (Reuters) – The European Central Bank kept policy unchanged as expected on Thursday, staying on course to claw back…

FRANKFURT (Reuters) – The European Central Bank kept policy unchanged as expected on Thursday, staying on course to claw back unprecedented stimulus even as the growth outlook continues to darken and political turmoil in Italy looms large over the currency bloc.

European Central Bank (ECB) President Mario Draghi talks at the ECB’s headquarters in Frankfurt, Germany, October 25, 201

8 at a news conference following the governance decision. REUTERS / Kai Pfaffenbach

Having exhausted much of its firepower With years of support, the ECB reaffirmed that its 2.6 trillion euro ($ 2.97 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 euro zone economy, ECB chief Mario Draghi reeled off what he called a “bunch of uncertainties” related to trade protectionism, emerging markets and financial market volatility.

“Is this enough of a change to make us change the baseline scenario? Svaret er ‘Nej’, ‘han fortalte ECBs nyhedsmøde om at justere sine beslutningstagere’ beslutning om at holde deres overbevisning om at risikoen forblev “bredt balanceret”.

He added: “The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our target will continue and will be maintained even after a gradual winding down of our net asset purchases.”

Yet Despite the hawkish message, which included an upbeat assessment of firmer wage pressures, the euro fell on his comment that Europe’s monetary union remained “fragile” as long as measures to shore up existing structures were not complete.

“And when I say completed, I mean the banking union, I mean the capital market union,” he added of measures initiated as a result of the sovereign debt crisis of almost a decade ago but which have foundered on a lack of consensus among member states.

The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, April 26, 2018. REUTERS / Kai Pfaffenbach

The single currency slipped 0.1 percent on the day to $ 1,139 after having earlier reached a session-high of $ 1,143.

Earlier, the Governing Council statement reaffirmed its view that interest rates would remain at present levels at least “through the summer of 2019”. Draghi completed the picture by adding there had been no discussion of extending stimulus.

(Graphic: The ECB’s QE program – tmsnr.rs/2OvmDhU)

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

European Central Bank (ECB) President Mario Draghi talks at the ECB’s headquarters in Frankfurt, Germany, October 25, 2018 at a news conference following the governance decision. REUTERS / Kai Pfaffenbach

With the EU having taken the unprecedented step of rejecting Italy’s budget this week, 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, 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 do not 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,” Draghi added.

(Graphic: Eurozone bond yield developments in key countries – tmsnr.rs/2O1LLIb)

($ 1 = 0.8763 euros)

Reporting by Balazs Koranyi; Writing by Mark John; Editing by Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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