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Era of stagnation will make ECB cut inflation target: UBS

The European Central Bank on Thursday left its key interest rates unchanged at its first policy meeting of the year, despite current volatility on the world's financial markets owing to concerns about the slowing Chinese economy.

[LONDON] A grim outlook for growth in Europe over coming decades could lead the European Central Bank to lower its target for inflation as early as next year, economists from the Swiss financial group UBS said on Wednesday.

In a report on the economic and institutional outlook for Europe until 2050, UBS's chief investment office also calculated the European Union would need to admit 1.8 million immigrants to match the workforce expansion that has helped the US economy grow over the past decade.

With Europe's population otherwise set to shrink, only mass immigration or a huge programme of productivity-focused reforms will raise euro zone growth rates much above 1 per cent over the next 30 years, it said. "It will be very difficult to get out of this cycle of low growth," the office's head of European macroeconomics, Ricardo Garcia, told a briefing on the report.

"Downward pressure on inflation is also likely and will make it harder for central banks to achieve their targets. That's why the ECB will sooner or later have to reduce its inflation target."

Euro zone inflation is close to zero, even though the ECB has cut interest rates into negative territory and bought billions in bonds to pump money into the economy.

The UBS report follows talk among bankers about whether the ECB will have to rethink its inflation target of close to but less than 2 per cent ECB policymakers have insisted on the importance of sticking to the existing goal. But the outlook for growth means doing so could force the bank to take on increasingly risky investments and bad debt that would eventually fall on Germany and other creditor nations, Mr Garcia said.

That would lead them to seek a lower target, which the euro zone's southern periphery would probably oppose because it would mean less action to support growth.

A compromise would probably commit the richer states to redistributive economic policies within the EU in exchange for a tighter rein on monetary policy.

In an email later to Reuters, Mr Garcia said: "The first opportunity (to cut the target) should be in 2017 or 2018. Growth has to be good, inflation at least at the target. It could also be combined with treaty change, but this would move it to the next decade. "The level would be 1 or 1.5 per cent."