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Bond-buying era draws to close as euro area gains strength

European Central Bank (ECB) president Mario Draghi believes the euro-area economy has the strength to cope with increased risk, which he says justifies the decision to stop bond purchases after a decade of financial crises and recession.

The stimulus tool will be phased out with €15 billion ($17.7 billion) of purchases in three monthly payments starting in October, Draghi said after his Governing Council convened in Latvia on Thursday. The ECB also said interest rates would remain unchanged at their current record lows at least until the middle of 2019.

Officials of the Frankfurt-based ECB, it seems, are betting that the euro-area economy will be resilient in the face of the threat posed by US trade tariffs and growing anxiety over the possibility that Italian Prime Minister Giuseppe Conte’s populist government will trigger another financial crisis. In a Bloomberg survey, nearly half of economists said they believed that the announcement would not be made before July.

“We’ve taken these decisions knowing that the economy is in a better situation, with an increase in uncertainty,” Draghi told reporters in the Latvian capital Riga. “We may well have this soft patch being somewhat longer than in the staff projections in some countries.”

The euro fell on the outlook for interest rates, trading 1% lower shortly after the announcement

Just hours before the ECB’s announcement, the US Federal Reserve hiked interest rates for the second time in 2018, bringing into sharp focus the fact that the flow of easy money in Europe and America over the past decade is gradually ending. However, China and Japan are not following America’s lead; the People’s Bank of China is not raising its rates and the Bank of Japan is expected to keep its stimulus measures in place when it gathers this week.

The euro dropped on the outlook for interest rates, trading 1% lower shortly after the announcement. Before the decision economists predicted that borrowing costs would rise around the middle of next year.

The ECB decision on ending asset purchases comes with caveats attached. Draghi said it would be “subject to incoming data,” and that the ECB would keep rates at record lows for “as long as necessary,” with the aim of achieving 2% inflation over the medium term. The ECB chief added that the Governing Council “stands ready” to make policy adjustments when necessary.

Draghi said the EBC forecasts that economic growth will slow to 2.1%  this year, 0.2% down from its previous forecast of 2.4%. The ECB’s 2019 and 2020 estimates remain at 1.9% and 1.7% respectively.

The rate of inflation is expected to be 1.7% in 2018, up from the 1.4% predicted previously due to higher oil prices. That pace is expected to continue over 2019 and 2020.

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