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Rehn: Very low eurozone inflation worry

Friday, January 24 16:07:53

Prolonged low inflation in the euro zone would make the necessary economic rebalancing of the 18-nation currency area harder to achieve, EU Economic and Monetary Affairs Commissioner Olli Rehn said today.

In an interview with Reuters Insider television at the World Economic Forum in Davos, Rehn said he did not believe the euro zone was facing the risk of deflation for now, contrary to International Monetary Fund warnings, because the European Central Bank is committed to act if the situation worsens.

However, he said inflation, which stands at 0.8 percent now, needed to be closer to the ECB's target of just below 2 percent to permit the necessary adjustment.

The ECB's own forecast is for inflation of just 1.3 percent this year, well below that target. ECB President Mario Draghi has said the central bank will act to ease monetary policy further if that outlook deteriorates.

"We are probably facing a lengthy period of low inflation and in this regard it is important to take into account that the successful rebalancing of the euro zone economy would require that the ECB could by and large meet its inflation target so the situation would not be asymmetric," Rehn said.

"A lengthy period of low inflation can make it more difficult if this low inflation is caused by the core Europe inflation being very low.

"It's natural that in the periphery which is adjusting - Spain, Italy, Portugal, Greece - their inflation has to be very low because they are recovering competitiveness and boosting exports.

"In order to succeed in the rebalancing process of the whole euro zone, average inflation should be close to the 2 percent goal that the ECB has set," the commissioner said.

Rehn acknowledged that a planned review of the quality of European banks' assets and stress tests to be conducted by the ECB this year were weighing on the provision of credit to the private sector, particularly small and medium-size business.

But he said cleaning up the banks was a prerequisite for reviving SME lending. The United States' economy was now roaring ahead because it had cleaned up its banks.

"The most serious bottleneck in Europe is in terms of lending to SMEs, especially in southern Europe," Rehn said. "But we cannot break that negative cycle by avoiding problems.

"Instead we have to tackle the problems of the banking sector in Europe, and the asset quality review will indeed do that... and move into a state where they can recover lending to the SMEs."