March 8, 2018 / 8:16 AM / 5 months ago

Euro zone bonds steady as ECB tests QE waters

* ECB decision at 1245 GMT, news conference at 1330 GMT

* ECB may drop QE easing bias - economists

* Trade war fears in background

* German Bund yield above 5-week lows

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, March 8 (Reuters) - Borrowing costs in the euro area were steady on Thursday, before a European Central Bank meeting that could mark a tentative step by policymakers towards exiting its ultra-loose monetary policy.

The ECB is expected to keep its policy unchanged but, against a stronger economic backdrop, could signal a move towards ending its 2.55 trillion ($3.16 trillion) asset purchase scheme later this year.

Having promised to review their communication stance in early 2018, and with asset purchases due to end in September, the ECB could give investors at least a few hints to prepare them for a broader revision of policy in coming months.

“Thursday’s ECB meeting ...could contain some very subtle hints that the end of quantitative easing is close,” said Craig Erlam, senior market analyst at OANDA.

Euro zone bond yields were little changed, with Germany’s benchmark 10-year bond yield flat on the day at 0.66 percent and holding above Monday’s five-week low of around 0.60 percent.

Bond yields, which started the year sharply higher on expectations of an imminent shift in the ECB’s policy stance, have drifted back down in recent weeks.

Low inflation, which hit a 14-month low in February, has tempered market expectations for an ECB rate rise coming sooner rather than later.

A key market gauge of long-term euro zone inflation expectations this week dipped below 1.7 percent to its lowest level this year, while the euro’s exchange rate against the currencies of the bloc’s main trading partners on Wednesday rose to its highest level since 2014.

Currency strength puts downward pressure on inflation, making it harder for the ECB to achieve its near 2 percent inflation target.

More recently, fears about a global trade war and political uncertainty in Italy following an inconclusive national election could encourage the ECB to go slow in removing monetary stimulus.

Still, Kjersti Haugland, chief economist at DNB Bank, said she did not think trade war fears would impact Thursday’s ECB meeting.

“There is a lot of noise and speculation but they will want to watch how things develop. If there are ripple effects then it will influence growth forecasts and the way they conduct their policy,” she said.

The ECB announces its policy decision at 1245 GMT, followed by ECB President Mario Draghi’s news conference at 1330 GMT, which will include a quarterly update of economic projections.

Ahead of the ECB meeting, money markets continued to price in a 10 basis point rate rise in early 2019, although expectations for a hike as early as this December have been scaled back.

Reporting by Dhara Ranasinghe; Additional reporting by Sujata Rao

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