MNI STATE OF PLAY: ECB To Wind Down QE; Trade A Downside Risk

--The ECB Expects To End Asset Purchases In December

--Trade Uncertainties Now "More Prominent"

By Luke Heighton

     FRANKFURT(MNI) - The European Central Bank reaffirmed its rate guidance and

plans to wind down its asset purchase programme, but stressed downside risks

from protectionism and emerging markets.

     Eurozone growth remains "broad-based," President Mario Draghi said, adding

that the latest data supported predictions for gradually rising inflation,

despite a "slight" downward revision in the medium-term growth forecast in

September's ECB staff projections.

     The 10-basis-point cuts in the growth outlooks for 2019 and 2020 -- to 1.9%

and 2.0% -- were "mainly due to a somewhat weaker contribution from foreign

demand," Draghi told a press conference.

     "Uncertainties relating to rising protectionism, vulnerabilities in

emerging markets and financial market volatility have gained more prominence

recently," he said.

     --DECEMBER END TO QE DEPENDS ON DATA

     As expected the ECB will halve its asset purchases to EUR15 billion a month

from October, but it left itself some room for manoeuvre by stating that the

final decision to end quantitative easing in December remained contingent on

incoming data confirming the medium-term inflation outlook. Guidance for rates

to remain at their current levels at least through the summer of 2019, and for

as long as necessary to boost inflation to target, remained unchanged.

     "Significant monetary policy stimulus is still needed to support the

further build-up of price pressures and headline inflation developments over the

medium term," Draghi said.

     Measures of underlying inflation remained "generally muted", he said, but

had increased from earlier lows, while high levels of capacity utilisation and

tightening labour markets have pushed up wage growth.

     The ECB president said the Council had yet to discuss reinvesting principal

payments on its maturing loans, nor was there any discussion of either a rate

hike or "operation twist".

     It was also too soon for members of the Governing Council to have discussed

whether they might raise rates in increments greater than 10bps at the end of

the current forward guidance period, Draghi said.

     --INFLATION UNCERTAINTY RECEDES

     Outlining the reasons behind the Council's decisions, he pointed to a

quarter-on-quarter increase in euro real area GDP of 0.4% in the second quarter

of 2018 -- the same rate of growth seen in the previous quarter -- with private

consumption supported by ongoing employment gains.

     Euro area annual HICP inflation was 2.0% in August, down from 2.1% in July,

according to Eurostat flash estimates, with headline inflation expected to

"hover around the current level" for the remainder of the year on the basis of

current oil futures prices.

     "Uncertainty around the inflation outlook is receding", Draghi said.

"Looking ahead, underlying inflation is expected to pick up towards the end of

the year and thereafter to increase gradually over the medium term, supported by

our monetary measures, the continuing economic expansion and rising wage

growth".

     September 2018 ECB staff projections for annual HICP inflation in 2018,

2019 and 2020 remained at 1.7%, he said, unchanged from June's estimates.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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