July 26, 2018 / 2:25 PM / a year ago

REFILE-UPDATE 2-Draghi's pledge on low interest rates hits euro, lifts bonds

(Refile to fix economist surname in paragraph 14)

* Euro falls after Draghi reaffirms outlook for low rates

* Bond yields pull back from highs, stocks rally

* Draghi upbeat on inflation outlook

* Says ECB did not discuss reinvestments from maturing bonds

By Dhara Ranasinghe and Tom Finn

LONDON, July 26 (Reuters) - The euro fell, stocks extended gains and bond yields pulled off their highs on Thursday, after ECB boss Mario Draghi reaffirmed a commitment to keep interest rates low “through” next summer, even though he saw inflation picking up by the end of the year.

After the European Central Bank, as expected, kept interest rates on hold, Draghi told reporters inflation uncertainty was receding, though he cautioned it was “too early to call victory”.

He also sounded an optimistic note on euro-area economic growth, saying it remained “solid and broad-based”.

The euro, which had inched higher following Draghi’s optimistic comments on growth and inflation, eased to a session-low of $1.16525 after Draghi reiterated interest rates would stay low for a while yet.

The single currency stood 0.55 percent down on the day, while European stocks extended gains after Draghi spoke to trade 0.8 percent higher.

Government bond yields, meanwhile, trimmed rises on confirmation of the low rate outlook.

“Markets are still focused on the rate guidance. It looks like he (Draghi) was trying to guide markets towards a rate hike from September onwards,” said Marchel Alexandrovich, European financial economist at Jefferies in London.

“They are relatively confident on the recovery and I’m surprised that there was not more focus on the bullish comments on inflation.”

Germany’s 10-year government bond yield, the benchmark for the euro zone, was just 1 basis point higher in late trade at 0.40 percent. It briefly touched the day’s high at 0.424 percent, which was on par with six-week highs hit earlier this week, after Draghi’s inflation remarks.

Other 10-year bond yields in the euro area also trimmed earlier rises .

Draghi’s comment cemented the bank’s commitment to stick to the dovish pledge that had stunned markets at the bank’s June meeting and lays to rest any belief that hawkish ECB policymakers could sway the board towards an earlier move.

Euro zone money markets fully price in a 10 basis point hike in the ECB’s minus 0.40 percent deposit rate in October 2019, showing little change in pricing following the ECB news conference.

Stefan Legge, an economist at the University of St Gallen in Switzerland, predicted Draghi was likely to raise rates just before his term ends next October. He noted that purchasing managers’ indexes this week had indicated euro zone growth flagging, pointing to third-quarter growth of just 0.4 percent

“The ECB today factored in the recent PMI data that shows the economy is not doing so well that (it) warrants an earlier rate hike but also not so weak that it needs further action,” Legge said.

Reporting by London markets team; Writing by Sujata Rao; Editing by Larry King and Jon Boyle

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