April 1, 2014 / 9:23 AM / 3 years ago

EU's Rehn worried about risks if low inflation prolonged

European Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference on macro-financial assistance to Ukraine, in Brussels March19, 2014. REUTERS/Francois Lenoir

ATHENS (Reuters) - Prolonged low euro zone inflation would make it harder to correct imbalances in the region, the EU’s top economic official said on Tuesday, adding pressure for monetary policy action after price growth slowed in March.

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.

But the ECB is expected to resist calls for further monetary stimulus, either by cutting rates or via less conventional measures, at its policy meeting on Thursday.

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,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters before a meeting of euro zone finance ministers.

Consumer price growth slowed to 0.5 percent year-on-year last month from 0.7 percent in February, preliminary data showed on Monday - increasing the risk of deflation and far below the ECB’s target of below but close to 2 percent.

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.

The chairman of euro zone finance ministers Jeroen Dijsselbloem said ECB President Mario Draghi would explain to the ministers what the central bank’s view was.

Asked about the risk of deflation, and what the ECB should do about it, Austrian Finance Minister Michael Spindelegger said economic growth was a priority.

“Our experts at the ECB know very well what can be done. For me it is important that reforms in member states will continue. We need to generate growth in the European Union again... this is decisive,” he said.

Still, a majority of traders polled by Reuters said the ECB would keep monetary policy unchanged on Thursday.

Bundesbank President Jens Weidmann said on Saturday, before the publication of the March inflation estimate, that the euro zone was not in a deflationary cycle and that the ECB should not overreact to a slowdown in inflation caused largely by cyclical factors, which should prove temporary.

Writing by Jan Strupczewski; Editing by John Stonestreet

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