The European Central Bank has said it will set out plans to end its €2tn economic stimulus programme next month, sending the euro near its highest levels in more than two years as investors bet Mario Draghi is preparing to end seven years of crisis-era firefighting.

Amid rising confidence in the underlying strength of the eurozone’s recovery, Mr Draghi said the bank was likely to take the “bulk of decisions” on how to wind down its €60bn-a-month bond-buying programme at its next meeting in October.

The euro spiked 1 per cent to above $1.20 on Thursday after the ECB chief said policymakers had a “very, very preliminary discussion” about how to phase out the quantitative easing programme at its governing council meeting.

The ECB first began purchasing eurozone sovereign bonds at the outset of the crisis in 2010, initially to shore up confidence among Greek debt holders, but then in an unprecedented eurozone-wide bond-buying programme in March 2015 aimed at staving off deflation and reinvigorating the bloc’s economy.

Some economists have worried that the rising euro could stifle the eurozone’s strengthening economic growth by making exports more expensive. Mr Draghi acknowledged that the currency’s recent volatility “represents a source of uncertainty” and threatened to cut short the region’s export boom.

But if Mr Draghi’s remarks were an effort to talk the euro away from record levels, investors were not listening. At the end of the European trading day, the euro held above $1.20 and was near an eight-year high against the British pound, at €0.92.

The governing council kept the bank’s main refinancing rate at zero. It also left its deposit rate at minus 0.4 per cent, in effect charging a levy on lenders’ deposits parked at the region’s central banks.

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The ECB is widely expected to start unwinding QE in 2018, spurred by improvements in the eurozone economy and amid fears over shortages of eligible bonds to purchase. How suddenly the end comes has been a preoccupation for the bank and investors in euro assets, who threw a mini “taper tantrum” earlier this year after Mr Draghi declared victory in his fight against deflation.

“The bank will be forced next year to scale down purchases,” said Jörg Krämer, an economist at Commerzbank. “However, if the euro made further gains, the tapering process could be slowed down.”

Mr Draghi said policymakers discussed the trade-offs between winding the programme down qucikly or a slower end that would gradually taper bond purchases over several months.

The governing council did not discuss expanding the types of assets it buys, Mr Draghi said.

He hinted markets were right to bet against the ECB increasing interest rates before 2019, saying repeatedly that low interest rates would remain in place “well past the horizon” of QE.

The stronger euro is complicating the ECB’s exit from its crisis-era monetary policies, reducing prices of imports and putting the region’s exporters at risk of falling sales. Economists have struggled to explain why inflation has remained below the ECB’s target of just under 2 per cent despite the broadening recovery, and some doves are reluctant to end economic stimulus before inflation returns.

The central bank was forced on Thursday to lower its projections for inflation in 2018 and 2019 on the back of the single currency’s rise. The ECB now expects inflation of 1.5 per cent this year, 1.2 per cent in 2018 and 1.5 per cent in 2019.

However, Mr Draghi said he was confident that inflation would hit its goal in 2020 — a year after he is expected to step down as ECB president. In June, inflation was expected to hit 1.5 per cent this year, 1.3 per cent in 2018 and 1.6 per cent the following year.

Mr Draghi said the euro’s recent appreciation “requires monitoring”. He said “a broad consensus” among the 25-strong membership of the governing council agreed the currency’s volatility had become problematic, compared with just a few members around the time of the last meeting in July.

The QE programme is widely credited with reviving eurozone growth and blunting the threat of deflation. A new estimate of euro area growth published by the EU statistics agency on Thursday showed that the region’s economy expanded by 2.3 per cent in the year to June — a higher figure than originally thought.

The ECB revised up its growth forecasts, predicting an impressive 2.2 per cent this year, 1.8 per cent in 2018 and 1.7 per cent in 2019. In June, it expected growth of 1.9 per cent this year, 1.8 per cent in 2018 and 1.7 per cent in 2019.

Additional reporting by Roger Blitz

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Latest updates As it happened

Euro trims gains as eyes turn to October
And that's a wrap.

The euro gave up some of its gains as the conference came to an end, but is still up around 0.76 per cent for the day, just above the $1.20 mark.

As predicted, today's meeting gave us a preview of what's to come as Mario Draghi said the ECB's board had begun "very preliminary" discussions of how to wind down its bond-purchasing programme, but the real decision is likely to come next month. Until then, here's Claire Jones' report on today's events from Frankfurt.

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Chance of a 2018 rate rise falls to fresh low
Mario Draghi repeatedly stressed the ECB's commitment to keeping interest rates at their current levels as the QE programme winds down, and his comments have been reflected in market rate predictions.

Interest rate futures now imply just a 34.2 per cent chance of any rate rise next year, according to Bloomberg data. That's down from 46 per cent before the meeting started, and marks a fresh record low.

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Early analyst thoughts
With the press conference all wrapped up, the first economists' responses are starting to trickle in. Overall there's a sense that Mr Draghi's comments won't have been enough to make the euro reverse course, but he has left his options open to push back harder if it goes too far:

Pantheon Macroeconomic's Claus Vistesen says:

We think investors should notice that Mr. Draghi openly admitted that the stronger euro is inconvenient, and that it directly translates into a lower inflation forecast.

Mr. Draghi also hinted that the decision on the parameters of QE in part are directly tied to the path of the euro. That is significant signal in our view; it means that the duration and degree of monetary accommodation is now in part a direct function of the euro.

Marchel Alexandrovich, senior European Economist for Jefferies:

the message is that nothing has materially changed, but the softer inflation numbers give the ECB every reason to be patient and persistent with policy, while talking about a tightening in monetary conditions as a way of trying to limit the moves in the euro.

Finally, the ECB has signalled that in October it will likely publish the details of the QE programme in 2018. But Draghi is also very focused on the anchoring of short term interest rate expectations. The ECB knows that as they start to reduce QE, it will be crucial to make sure that borrowing costs for households and corporates don't spike.

Aberdeen Standard Investments' Patrick O'Donnell:

Draghi’s probably done enough to slow the appreciation in the euro but not the path of travel, which is up. There’s no question that the ECB is worried about the euro’s appreciation but there’s little he can actually do about it. That’s why the euro has rallied based on what Draghi has said: markets know there’s only so much he can say. Currencies are a relative game and the euro needs help from the dollar or sterling. Unfortunately for Draghi, with the dollar and sterling remaining relatively unloved, the euro will keep going up

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Press conference summary

There has been quite a bit of speculation in recent weeks about when the ECB will announce their plans for QE beyond December. Mario Draghi made clear today that he fully expects them to be able to lay out details after the Governing Council's next meeting, on October 26.

The Euro rose against the dollar following the ECB announcements and held on to most of the gains as Mr Draghi spoke. He struck a confident tone on prospects for growth and inflation and said he was not yet overly concerned that the strength of the currency would weigh on inflation, although he said this "requires monitoring". This clearly convinced the markets that policy tightening is starting to come into view.

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