The European Central Bank is set to debate whether to end its huge asset purchases by year-end, in what would be its biggest step towards dismantling crisis-era stimulus that pulled the euro zone economy out of recession.

Meeting as growth is slowing and political populism threatens to set off market turbulence, the ECB is expected to argue that its 2.55 trillion euro ($A 4 trillion) bond-buying scheme has done its job in bringing the 19-member currency bloc back from the brink of collapse.

Whether policymakers take the actual decision at their meeting in Riga on Thursday or hold off until July appears secondary as they have long argued that the scheme, commonly known as quantitative easing (QE), should be concluded and the policy focus shift to the expected path of interest rates.

The biggest complication could be the increasingly murky economic outlook, weighed down by a developing trade war with the US, a populist challenge from Italy’s new government and softening export demand.

But these factors could actually hasten the ECB’s decision rather than hold it back as the bank has little policy firepower left and a further weakening of the outlook could make a later exit more difficult.

Italian bond yields rose sharply this month as a new government promised increase spending, foreshadowing a clash with Brussels, which is pushing Rome to cut the euro zone’s second-biggest debt pile.

A broader slowdown could also make it harder to end stimulus, but the ECB has no mandate to prop up growth and is likely to argue that current rate of expansion is healthy enough to generate inflation.

Any decision will hinge on whether the ECB thinks the rebound in inflation is sustainable and that price growth will continue to rise towards its target of almost 2 per cent.

While much of the recent inflation is due to higher oil prices, increasing labour costs and a persistent drop in unemployment across the bloc suggests that the underlying trend is also favourable.

The euro’s 5 per cent fall against the US dollar since April is also helping the ECB as the weaker currency is increasing the cost of imports and boosting inflation.

While a rebound is likely, the US Federal Reserve is expected to keep tightening policy, limiting the potential for a big rise in the euro.

The Fed raised rates on Wednesday, dropped a pledge to keep them low enough to stimulate the economy “for some time” and signalled it may hike borrowing costs somewhat faster than earlier projected.

Markets are currently pricing in a 10 basis point hike in the ECB’s benchmark refinancing rate — currently at zero per cent — by June 2019.

Originally published as ECB ready to pull plug on stimulus scheme

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