ATHENS (Reuters) - The European Central Bank and euro zone finance ministers said they did not see a clear risk of deflation despite a sharp slowdown in price rises, but a longer period of low inflation could be a drag on the economy.
Euro zone inflation has been stuck in what the European Central Bank calls the “danger zone” below 1 percent since October, and it dropped further in March to its lowest level in more than four years, hitting 0.5 percent year-on-year.
“The growth rate of inflation is of concern,” ECB vice-president Vitor Constancio told a news conference after the first day of a meeting of European Union finance ministers and central bank governors in Athens.
“It seems to indicate that Europe and the euro area can be in a protracted period of low inflation. That can constitute a drag on the recovery,” he said.
But asked if the low inflation could turn into deflation, Constancio said: “We see no deflation prospects.”
The ECB will discuss its monetary policy response to the low inflation on Thursday but economists expect the bank to resist calls for further monetary stimulus, either by cutting rates or via less conventional measures.
Italian Economy Minister Pier Carlo Padoan backed that view.
“There are no evident risks of deflation and this is based on the fact that inflation expectations in the medium term are anchored at normal levels of around 2 percent, which is the medium-term target for the euro zone,” Padoan said after the finance ministers’ meeting.
“That said, economic policy authorities are attentively monitoring how the situation is evolving... there will be a central bank board meeting on Thursday in which the situation will be further examined,” he said.
Constancio said he expected inflation to bounce back in April and pick up further as the euro zone’s economic recovery gradually gathers pace.
EU Economic and Monetary Affairs Commissioner Olli Rehn said prolonged low inflation “would obviously increase real disposable incomes, but on the other had it would have a slowing down effect on the rebalancing of the euro zone economy.”
The International Monetary Fund has repeatedly called on the ECB to either cut rates or inject more cash into the economy via quantitative easing - purchases of public and private assets.
Like Rehn, the IMF argues that with low inflation, highly indebted euro zone countries face a much more difficult task to reduce their debt, regain competitiveness and tackle high unemployment.
Adding to the challenge is a strengthening euro which makes the currency bloc’s exports more expensive.
Additional reporting by Steve Scherer and Giselda Vagnoni; Writing by Jan Strupczewski; Editing by John Stonestreet/Ruth Pitchford