The eurozone faces a real risk of deflation, with medium and long-term inflation expectations now at historically low levels, European Central Bank governing council member Ignazio Visco said on Friday.
Noting that the outlook for economic growth has weakened across the euro zone, Visco, who is also governor of the Bank of Italy, said 5-10 year inflation expectations had fallen below 2 per cent, the ECB’s level for price stability.
“We are not in deflation but we cannot ignore the concrete risk of it,” he said, in a speech to a conference in Rome.
He said worsening macroeconomic prospects had brought a return of instability to financial markets which he said could hit Italian government bonds unless there were clear signs of recovery after years of severe economic crisis.
“Investor interest in Italian securities is continuing but our economy has to show clear signs of recovery to prevent low growth being reflected in their valuations,” he said.
Visco also endorsed Prime Minister Matteo Renzi’s calls for more flexibility in the application of European Union budget targets, saying that respecting the targets to the letter risked worsening budget imbalances.
“Very low inflation, far from the price stability objective and which does not only reflect weak commodities prices, can make the strict respect of deficit rules not only more burdensome but can create pro-cyclical effects,” he said.
He said a more ambitious pursuit of budget objectives “could worsen the very imbalances which it is intended to contain.”
(Reporting by James Mackenzie)
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