ECB chief sees 'limited' risk of deflation in eurozone

[BERLIN] The European Central Bank cannot entirely rule out the risk of the deflation in the eurozone, but that danger is limited, its chief Mario Draghi said in a newspaper interview on Friday.

"The risk cannot be ruled out completely, but it's limited," Mr Draghi told the business daily Handelsblatt.

"If inflation is too low for too long, then it can happen that people will bet on a further fall in prices and postpone spending. We haven't reached that point yet. But we have to prepare for that risk," Mr Draghi said.

At just 0.3 per cent in November, eurozone inflation is alarmingly low and could even fall further as a result of falling oil prices.

Low inflation or even falling prices may sound good for the consumer. But from a central bank's point of view, they can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.

The ECB has already rolled out a raft of different measures to try and push inflation back up to the 2.0 per cent it regards as economically healthy.

But the risk that the central bank will not be able to fulfil its price stability mandate "has increased compared to six months ago," Mr Draghi said.

As a result, the ECB "is currently technically preparing to adjust the size, speed and composition of our measures at the start of 2015, should it become necessary to react to too long a period of too low inflation," Mr Draghi said.

The ECB's policy-setting governing council "is unanimous about this," he said.

So far, the ECB has cut its interest rates to new all-time lows, made unprecedented amounts of cheap loans available to banks via its LTRO and TLTRO programmes, and embarked on asset purchase programmes (ABSs and covered bonds) to pump liquidity into the financial system.

But given the stubbornly low level of inflation, the ECB has also started considering possibility of large-scale purchases of sovereign debt, so-called "quantitative easing" or "QE".

This is a policy used by other central banks to help jump-start their moribund economies, but which the ECB has so far shied away from, not least because the measure has many opponents in Europe, including the mighty German central bank or Bundesbank.

Critics see QE as a licence to print money to get governments out of debt, which the ECB is strictly forbidden from doing under its statutes.

Turning to the economic situation in the euro area, Mr Draghi said the single currency bloc likely faces "a long period of weakness more than a crisis." But he said he was "cautiously optimistic" that the bank's measures would be enough to return all eurozone members to growth in 2015.

Governments must press ahead with much-needed structural reforms to get their economies in order, Mr Draghi said.

"My complaint is that there is too much bureaucracy and taxes are too high," he said.

"In Europe, the tax burden is one of the highest in the world. That is a serious competitive disadvantage." All the necessary structural reforms - more flexible labour markets, less bureaucracy and lower taxes - "these are all going much too slowly, Mr Draghi complained.

AFP