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ECB Takes Step Toward Ending Its Stimulus Program

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03/08/2018 | 02:17pm CEST

By Tom Fairless

FRANKFURT -- The European Central Bank took a small but significant step on Thursday to scale back its large monetary stimulus, in an unexpected move that acknowledges the booming eurozone economy and brushes off concerns over a surging euro and the threat of global trade wars.

In a policy statement, the ECB dropped a long-held pledge to accelerate its EUR30 billion-a-month bond-buying program if the region's economy deteriorates. That promise, designed to reassure investors, had been criticized by some ECB officials as excessive given the strength of the bloc's economic recovery.

The move sets the ECB firmly on course to phase out a historic stimulus program that is credited with reinvigorating growth in the 19-nation eurozone but has faced heavy criticism in the bloc's biggest economy, Germany.

"A small step for monetary policy, a bigger one for the ECB," tweeted Frederik Ducrozet, an economist at Pictet Wealth Management in Geneva.

The change in language sparked a small market reaction, driving the euro from $1.237 before the announcement to as high as $1.243 in the moments afterward, leaving the single currency up around 0.1% on the day.

German 10-year government bond yields also rose, from around 0.673% before the release to as high as 0.695% afterward.

Investors have been watching closely for signs as to when the Frankfurt-based central bank will phase out its quantitative-easing program and start raising interest rates. The timing of that decision will have a large impact on market interest rates and asset prices.

The ECB said in its statement that it will continue to purchase bonds through September, "or beyond if necessary," and that its key interest rates won't rise "for an extended period of time."

Investors will now turn their attention to Mario Draghi's news conference at 8:30 a.m. ET, where the ECB president could provide color on an internal debate over how quickly to wind down the EUR2.5 trillion ($3.1 trillion) bond-buying program. Mr. Draghi is also set to reveal fresh forecasts for growth and inflation in the 19-nation currency bloc.

The eurozone economy grew at an annualized pace of 2.7% in the fourth quarter of last year, and unemployment is expected to fall to 8% by the end of the year, the lowest level in a decade. Inflation has remained disappointingly weak, however. It slid to just 1.2% last month, some way from the ECB's target of just below 2%.

ECB officials had signaled they could give fresh guidance on the QE program early this year, but analysts had curbed their expectations for Thursday's meeting in recent days, pointing to burgeoning risks in the world economy.

Financial markets have seesawed since the ECB's January policy meeting amid concerns over the retreat of central banks and, more recently, the risk of global trade wars as the U.S. prepares to impose tariffs on several key imports.

Mr. Draghi has also stressed that the ECB is closely monitoring financial-market volatility and a recent appreciation of the euro currency, which has risen to $1.24 from $1.06 a year ago.

Write to Tom Fairless at tom.fairless@wsj.com

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