The European Central Bank pledged yesterday to keep its aggressive stimulus policy at least until the end of the year, arguing that inflation pressures in the eurozone remained weak despite expectations of faster price growth.

While expected, the decision showed the ECB’s leadership was resisting calls from Germany to start winding down its €2.3 trillion bond-buying scheme, or at least signal its intention to do so, as growth and inflation rebound.

Instead, the Frankfurt-based central bank stuck to its plan of continuing the purchases until December. Crucially, it also pledged to keep interest rates at current, record-low levels until long after that, or even cut them if necessary.

“If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration,” the ECB said in a statement.

Nearly a decade after the 19-country currency bloc’s woes began, its economy is looking in better shape

Justifying the stance at his regular news conference afterwards, ECB president Mario Draghi presented upgrades in inflation expectations for this year and next but argued they did not alter the overall picture.

“There is no sign yet of a convincing upward trend on underlying inflation,” he told reporters, adding that inflation – which hit its target of almost two per cent last month – was expected to rise “only gradually” in the medium term.

The ECB now sees headline inflation of 1.7 per cent this year compared to an earlier estimate of 1.3 per cent, and 1.6 per cent next year compared to a previous 1.5 per cent estimate. It saw prices rising an unchanged 1.7 per cent in 2019.

The ECB is scheduled to cut the pace of its bond purchases by a quarter from next month but continue them at least until year-end, or longer if it thinks inflation is below target.

But nearly a decade after the 19-country currency bloc’s woes began, its economy is looking in better shape.

Economic sentiment is at a six-year high, trade is rebounding, services and manufacturing output is rising, and unemployment is at its lowest since 2009. Draghi accordingly announced small upgrades to eurozone growth forecasts, now seen at 1.8 per cent this year and 1.7 per cent next.

Germany’s central bank governor Jens Weidmann and ECB director Yves Mersch have both made the case for ruling out further rate cuts.

German Finance Minister Wolfgang Schaeuble went further yesterday, saying he was in favour of a “timely start to the exit” from the ECB’s loose monetary policy, echoing calls from the German banking association and the Ifo economic institute.

That has left Draghi walking a tightrope, as improvements on the economic front are at risk of being derailed by hazards including the Dutch and French elections and global economic governance under new US President Donald Trump.

Economists in a Reuters poll said the ECB’s next move would be either a tweak of its guidance in the second half of this year or a gradual reduction in its asset-buying next year.

Among political risks on the horizon, the French election is likely to be a particular concern. With far-right candidate Marine Le Pen wanting to take France out of the eurozone, markets are already bracing for a shock.

The cost of insuring French government debt against default has doubled since the start of the year – while the yield differential between five-year French and safe-haven German bonds rose to its highest level since 2013 last month.

Investor nerves are affecting debt of periphery countries such as Italy and Portugal even though the ECB’s main indicator of stress in the financial system is trending downwards.

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