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ECB's Constancio sees negative inflation rate in months ahead-magazine

BERLIN (Reuters) – European Central Bank Vice President Vitor Constancio said in a magazine interview he expected the euro zone inflation rate to turn negative in the coming months but added that if this was just a temporary phenomenon, he did not see a risk of deflation.

Annual inflation in the euro zone slowed to 0.3 percent in November as energy prices fell, putting it well below the ECB’s target for inflation close to but just below 2 percent.

In early December the ECB had forecast 0.7 percent inflation for 2015 but Constancio told Germany’s WirtschaftsWoche oil prices had fallen by an extra 15 percent since then and that, while that should support growth and so drive up inflation in the longer term, it created a tricky situation in the short-term.

“We now expect a negative inflation rate in the coming months and that is something that every central bank has to look at very closely,” Constancio was quoted as saying in an interview due to be published on Monday.

But he said that several months of negative inflation would not translate into deflation: “You’d need negative inflation rates over a longer period for that. If it’s just a temporary phenomenon, I don’t see a danger.”

Constancio said the euro zone was not in deflation and there was also not a risk of this for every country in the single currency bloc. He added that rising productivity in countries like Ireland and Spain could, for example, create scope for wage rises, which would counter deflation dangers.

He said forecasts from the International Monetary Fund, the European Commission and OECD that the euro zone’s economic weakness would continue until 2018 meant there would be downward pressure on inflation until then.

By buying asset-backed securities (ABS), or bundled loans, which the ECB began doing on Nov. 21, as well as purchasing covered bonds and offering new loans to banks, the ECB aims to increase the size of its balance sheet back to levels seen in early 2012.

Constancio said there had been no decision on what extra measures the ECB would take to bring about monetary easing next year, adding that the bank would, in early 2015, assess the effectiveness of measures it had taken this year.

He said the ECB needed to employ all monetary policy tools at its disposal, adding that the bank needed to act if inflation was too low to maintain its credibility and so would need to use channels it had not touched before.

He said quantitative easing was “totally legal” and the ECB did not rule out what was legal.

Constancio also said the ECB did not have an exchange rate target and did not measure the success of its monetary policy measures on the basis of their impact on the euro.

(Reporting by Michelle Martin, editing by William Hardy)

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