UPDATE 1-ECB's Noyer says euro zone situation is not deflation

Thu Feb 6, 2014 2:31pm EST

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PARIS Feb 6 (Reuters) - The euro zone's fragile economic recovery and low inflation is "not normal, but not alarming," European Central Bank policymaker Christian Noyer said on Thursday, rejecting the idea that deflation was a risk.

On Thursday, the ECB kept its key refinancing rate at 0.25 percent. Some analysts had thought it would further reduce the already low rate given falling inflation.

"I say it with the greatest firmness: The situation has nothing to do with deflation," Noyer told Les Echos daily in an interview to appear in its Friday edition.

"The situation is not normal, but it's not alarming."

Noyer, who is also governor of the Bank of France, estimated France's overall economic growth at 0.9 percent in 2014, backing the government's estimate.

He said President Francois Hollande's recently announced business-friendly policies aimed at reviving the euro zone's second-largest economy went "in the right direction."

But more needs to be done, he said, to alleviate dwindling productivity and a lack of flexibility in the economy.

Hollande's pledges to ease the tax burden on French companies "must absolutely accompany strong structural reforms to attack the rigidities," Noyer told the business newspaper, adding that public administration also needed to be streamlined.

The Socialist president's so-called "responsibility pact" designed to lower taxes on employers by 30 billion euros by 2017 should correspond to a 1 point rise in GDP and create several hundred thousand jobs, Noyer said.

"But we must let each business free to use these lower charges according to their own situation," Noyer said, saying that while some will cut their prices, others may choose to widen their margins, invest or hire.

As for the ECB's decision not to trim its key refinancing rate, Noyer said there were no new elements to justify any such move.

Asked whether the strengthening of the euro posed a problem, Noyer said that given the euro zone's lag behind the United States in terms of economic recovery "it would be normal to see the currency weaken, which will additionally facilitate a rise in inflation towards our target."

The ECB has a euro zone inflation target of just under 2 percent.

At Thursday's policy meeting, ECB President Mario Draghi warned that emerging-market turbulence could hit the zone, in what could put further downward pressure on prices. (Reporting By Alexandria Sage; Editing by Robin Pomeroy)

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