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ECB Draghi raises the prospect of slower inflation as prospects worsen

FRANKFURT (Reuters) – The European Central Bank plans to add a stimulus at the end of the year, but inflation could rise more slowly than previously expected, ECB President Mario Draghi said Friday.

FILE PHOTO: The President of the European Central Bank (ECB), Mario Draghi, arrives at the 28th Frankfurt European Banking Congress (EBC) on 1

6 November 2018 at the Alte Oper in Frankfurt. REUTERS / Ralph Orlowski

The Eurozone The economy has slowed in recent months due to weaker demand from China, higher interest rates on dollar borrowers around the world and troubled bond markets in Italy, where the new government wants to increase spending ,

Draghi saw "no reason" to expect the Eurozone economy to stop expanding and drag down on price growth. However, he warned against increasing uncertainty about the outlook.

"As companies become more uncertain about the growth and inflation outlook, margin margins may prove more persistent," said Draghi at a banking conference.

"This would affect the speed at which underlying inflation rises and hence the inflation path we expect to see in the coming quarters," he added. "Uncertainties regarding the medium-term outlook have increased."

The ECB continued to see the risks to growth prospects broadly balanced, Draghi said, but would re-evaluate the situation in December as new growth and inflation forecasts become available.

The central bank plans to soften the € 2.6 trillion bond purchase program later this year, prompting investors to expect the first rate hike since 2011 sometime next year.

Draghi said in his speech to these plans, but warned that an excessive rise in borrowing costs in the euro area would change the path of interest rates, suggesting an overflow from the United States or possible implications from Italy.

"When financial or liquidity conditions become excessively aggravated or inflation outlooks deteriorate, our response is clearly defined," Draghi said. "This, in turn, should be reflected in an adjustment to the expected path of future interest rates."

Draghi, himself Italian, did not mention Italy in his speech. However, he warned against the risk of a widening of government bond spreads, a measure of investor confidence in a country's public finances.

"The lack of fiscal consolidation in highly indebted countries increases vulnerability to shocks, regardless of whether these shocks are caused autonomously by questioning the rules of the (Eurozone) architecture or are imported through financial contagion," he said.

"So far, the rise in government bond spreads has been largely limited to the first case, and contagion between countries has been limited," he said.

Reporting by Balazs Koranyi; Editing by Francesco Canepa, Larry King

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