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[LONDON] Britain urged the European Central Bank to take all necessary steps to fight off the risk of deflation, a week before ECB policymakers meet to discuss whether to embark on an unprecedented government bond buying programme.
Finance minister George Osborne, in a speech to be delivered on Wednesday, distinguished between Britain - where inflation has just hit a 14-year low of 0.5 per cent - and the euro zone where inflation has been lower for months. "The low inflation we see here in the UK - driven as it is almost entirely by external factors such as the oil price - is much more welcome than in the euro zone," Mr Osborne said in a speech extract provided by his office on Tuesday. "There the debate has understandably turned to the dangers of deflation - the risk of a self-reinforcing spiral where economic activity falters, consumers defer purchases ... and nominal debt burdens become ever harder to manage," he added.
Mr Osborne has urged the ECB previously to take action to revive the economy of Britain's biggest trading partner. But his latest intervention appears more forceful than before as the euro zone's weakness risks weighing on Britain's own prospects in the run-up to a finely balanced national election on May 7.
It comes as ECB President Mario Draghi and his colleagues prepare to decide on Jan 22 whether to buy hundreds of billions of euros of government bonds to lift euro zone inflation towards its target of just below 2 per cent.
This was the policy adopted by the United States and Britain at the start of the financial crisis, but is viewed with deep scepticism by some euro zone central bankers and politicians who fear it comes too close to bailing out spendthrift governments.
"Political systems should give their central banks the space and the independence to do their job," said Mr Osborne. "So I fully support Mario Draghi's efforts to ensure that the ECB does whatever it takes to meet its inflation mandate."
Mr Osborne also said euro zone politicians should consider making it explicit that the ECB should treat undershoots of its inflation target as seriously as overshoots, as is the case at the U.S. Federal Reserve and the Bank of England.
While Mr Draghi has said this is his approach, it is not spelt out in the treaties governing the ECB and not all policymakers appear to take the same view in practice.
Mr Osborne also reiterated comments made earlier on Tuesday that Britain was not at risk of deflation even if inflation falls further in coming months, citing rising earnings and public expectations that inflation would rise.
BoE Governor Mark Carney said on Tuesday that he still expected to start to gradually raise British interest rates at some point in the foreseeable future.