ECB will use ‘unconventional measures’ to fight deflation

Excessively low inflation in the euro zone should be dealt with as firmly as high inflation, ECB governing council member Ignazio Visco said today, adding that a strong euro had helped push inflation too low.

He reiterated that the European Central Bank was ready to use unconventional policies if new staff forecasts confirm inflation is set to remain well below the ECB's target of just under 2 per cent for the next two years.

The euro zone central bank’s policymakers next meet on June 5th. The ECB’s main refinancing rate stands at a record low of 0.25 per cent and the bank is expected to cut it and other interest rates further at its June meeting and adopt other measures aimed at boosting lending to smaller firms.

Euro zone inflation stood at just 0.7 per cent in April and is expected to remain at the same level in May. Mr Visco, who is also Bank of Italy governor, said the speed with which inflation expectations can change meant decisive action was needed to head off any risk of a deflationary spiral.

“The exchange rate is not in itself a monetary policy target, but at this stage the euro’s appreciation has compressed consumer price inflation,” Mr Visco also told the Italian central bank’s annual assembly. Italian EU-harmonised consumer prices were up just 0.4 per cent annually, falling short of forecasts for a 0.6 per cent annual rise, data today showed.

In its annual report published today, the central bank said foreign investors bought a net €37 billion of Italian bonds in the first quarter of this year, compared with a net €13 billion in all of 2013.

This showed a clear reversal of the trend started in the last months of 2011, when foreign investors shed Italian debt massively as the country was engulfed in the sovereign debt crisis.

Mr Visco warned, however, that historically low yields on euro zone government bonds may not last indefinitely and that global yields could rebound in response to a less expansionary monetary policy in the United States.

“Volatility on the financial markets in the advanced economies has subsided to well below the historic norm, reaching levels that in the past sometimes preceded rapid changes in the orientation of investors,” he added.

Reuters