ECB feels vindicated but risks gaining prominence: Draghi

NUSA DUA, Indonesia (Reuters) - The euro zone's continuing expansion has vindicated European Central Bank policy but risks to the outlook, from trade protectionism to the threat of a hard Brexit, are on the rise, ECB President Mario Draghi said on Friday.

The ECB has been dialling back stimulus for months and expects to end a 2.6 trillion euro asset purchase scheme in December, arguing that it has done enough to sustain growth and the rebound in inflation.

But Draghi also toned down earlier remarks, which foreshadowed a "relatively vigorous" rise in underlying inflation, merely predicting a "gradual" increase over the medium term.

"Recent developments vindicate the Governing Council's earlier assessments of the medium-term inflation outlook," Draghi said at the International Monetary Fund's annual meeting. "Uncertainty around the inflation outlook is receding."

In a potential reference to the rise in Italian yields, Draghi also played down concerns about recent market volatility, suggesting that this has not had a broader impact.

"With respect to financial stability more broadly, recent episodes of heightened financial market volatility have led to only limited contagion across countries and markets," Draghi told the IMF's International Monetary and Financial Committee in Bali.

Still, he warned of increasingly prominent external risks, which would impact euro zone growth.

"An orderly withdrawal of the United Kingdom from the European Union poses a limited overall risk to the euro area's financial stability," Draghi said.

"However, the uncertainty triggered by a cliff-edge Brexit could have the potential to pose a more significant downside risk to financial stability," he added.

(Reporting by Francesco Canepa; Writing by Balazs Koranyi; Editing by Matthew Mpoke Bigg)