MNI POLICY: APP To End In Dec; Inflation On Course - Draghi

By Luke Heighton

     VIENNA (MNI) - The European Central Bank anticipates ending its asset

purchase program in December, Mario Draghi said Monday, as he confirmed the

bank's medium-term inflation outlook despite "weaker than expected" recent data.

     "The underlying strength of domestic demand and wages continues to support

our confidence that the sustained convergence of inflation to our aim will

proceed, and will be maintained even after a gradual winding down of our net

purchases," Draghi said.

     Here are the key points from his speech in Brussels:

     -- Euro area GDP grew by 0.2% in the third quarter, following growth of

0.4% in both the first and second quarter. The loss in growth momentum mainly

reflects weaker trade growth, Draghi said, but also some country- and

sector-specific factors.

     -- A gradual slowdown "is normal as expansions mature and growth converges

towards its long-run potential. Indeed, looking further ahead, employment growth

is expected to slow somewhat as labor supply shortages become more binding."

Savings ratios will also normalise and temper consumption dynamics to some

degree. This is also reflected in ECB staff projections from September, which

see annual growth at 2.0% for this year, and then slightly lower rates of 1.8%

in 2019 and 1.7% in 2020.

     -- Some of the slowdown may also be temporary, and the latest data already

show some normalising of production in the car industry which has been impeded

by one-off factors. As world trade stabilises, albeit at a lower level, its drag

on growth could also be temporary. "At the same time, risks relating to

protectionism, vulnerabilities in emerging markets and financial market

volatility remain prominent."

     -- Underlying drivers of domestic demand remain in place. Household income,

which underpins domestic demand, continues to be supported by high levels of

capacity utilisation and further improvements in labour markets. The

unemployment rate declined to 8.1% in September 2018, which is the lowest level

observed since late 2008, and employment continued to increase in the third

quarter. "Moreover, business investment is supported by still very favourable

financing conditions in the euro area, together with solid demand and rising

profitability."

     -- HICP inflation increased to 2.2% in October 2018, from 2.1% in

September. Measures of underlying inflation "continue to be muted, but have

increased from earlier lows. Generally, there is good reason to be confident

that underlying inflation will gradually rise in the period ahead." Wages are

rising as labour markets continue to improve and labour supply shortages become

increasingly binding in some countries. Higher wage growth, "as well as a

recovery in producer and import prices, is expected to continue to support the

upward adjustment in underlying inflation. In addition, long-term market and

survey-based inflation expectations are reasonably well anchored and broadly in

line with this outlook."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$E$$$,M$X$$$,M$$EC$]