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Tuesday 30 September 2014

Euro zone risks extended period of low inflation, Lagarde warns

Published 04/03/2014 | 08:08

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International Monetary Fund (IMF) Managing Director Christine Lagarde
International Monetary Fund (IMF) Managing Director Christine Lagarde

The euro zone risks an extended period of low inflation, IMF chief Christine Lagarde said on Monday, urging central bankers to be ready to act to protect an incipient economic recovery.

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Speaking at an economic forum in the northern Spanish city of Bilbao, Lagarde said the International Monetary Fund saw low inflation in the economic bloc which could affect consumer spending, key to pulling the euro zone out of prolonged economic weakness.

"We're saying that the potential risk is out there. We range that risk at 15-20 percent, which is why we recommend that central bankers guard against it and have available the tools that could respond to that in terms of monetary policy," IMF Director Lagarde said.

Euro zone inflation is running at 0.8 percent, far below the European Central Bank's target of just under 2 percent, adding to pressure on the central bank to ease its monetary policy at its monthly meeting on Thursday.

Deflation, an extended period of falling prices, can undermine an economy as families and businesses delay spending on the chance of potential future bargains, creating a loop of low consumption and ever lower prices.

Lagarde's concern was echoed by others at the day-long event.

"There is certainly a risk (of deflation in the euro zone), but I am not worried. It comes from two factors in Europe, including the low cost of energy, food and other commodities, and the second is from the (fiscal and economic) reforms, certainly in the south of Europe, which have brought down the cost of production leading to low inflation," Jeroen Dijsselbloem, head of the Eurogroup of wuro finance ministers, told journalists.

Head of the Organisation for Economic Co-operation and Development Angel Gurria also said that, while he didn't believe there was imminent danger of euro zone deflation, there was a possibility of low price rises.

"There isn't enough economic strength and that's where there must be work," Gurria said

Reuters

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