ECB official warns of deflation risk; urges action on bond buying

Berlin

THE risk of deflation in the eurozone should not be underestimated and the best way for the European Central Bank (ECB) to deal with the problem is buying government bonds, Italy's central bank chief was quoted on Sunday as saying.

Ignazio Visco, who sits on the ECB's Governing Council, made the comments as the policymakers consider printing money to buy sovereign debt - so-called quantitative easing - to prevent the eurozone from slipping into a deflationary spiral.

"I can only warn against underestimating the macroeconomic risk (of low inflation rates)," Mr Visco told German newspaper Welt am Sonntag. "If the inflation figures remain very low for too long and the economy hardly grows, we risk being drawn into a downward spiral that will intensify itself on and on - that's what we call deflation," he said.

Eurozone inflation turned negative in December for the first time since 2009, with cheap oil driving a bigger than expected decline. "The cheap oil is helping the economy, no doubt. On the other hand, it also leads to low prices. And that's a problem when inflation rates are already near zero," Mr Visco said, adding that there was a risk that inflation expectations would fall further.

"In this situation, the most effective means is buying sovereign bonds," he said. "We are discussing different options in the ECB's Governing Council, also the purchase of other debt such as corporate bonds. But this market is not very big." REUTERS