June 29, 2014 / 6:00 AM / 3 years ago

ECB's Mersch says sees no acute risk of deflation

BERLIN, June 29 (Reuters) - The European Central Bank sees no acute risk of deflation, Executive Board Member Yves Mersch said in an interview broadcast on Sunday, but what it does see is a long period of low inflation ahead.

The ECB’s target for medium-term inflation is below, but close to 2 percent, a far cry from the current level of 0.5 percent, which has sparked concern the euro zone could enter a Japan-style deflationary spiral of falling prices, slowing growth and reducing consumption and investment.

“At the moment we see no heightened or acute danger of deflation, in the sense that consumers would change their behaviour and postpone making purchases because they expect prices to fall ... which would create a negative spiral causing more deflation,” Mersch told Germany’s Deutschlandfunk radio,

“What we do see is a long period of very low inflation. When we have such low inflation then the risk is greater, that should the European economy suffer an unforeseen external shock again, we have no buffer.”

The ECB on June 5 cut interest rates to record lows, the deposit rate to below zero, and launched a series of steps to boost lending to companies. The bank’s monetary policy committee is set to meet next on July 3.

Asked about widespread expectations that interest rates will stay low until 2016, Mersch said: “If everything else stays as it is today then that could be the model.”

“We as a central bank will try to fulfil our aim as quickly as possible, which is to bring inflation back towards the level of close to but below 2 percent. But this will take time, because currency policy takes a while to work through the different economic structures.”

Commenting on the bank’s recent measures, Mersch said the curve for short-term interest rates had moved down by 10-15 basis points.

“In this respect, our measures have had the desired effect,” he said.

He dismissed fears of an asset bubble building in property prices or in stocks.

“Just as in Germany you have regions where property is worth less now, when adjusted for inflation, than 40 years ago, we also can’t speak of an asset bubble on the stock exchange,” he said.

“We could though have a risk of overheating if things continue as they are.” (Reporting by Alexandra Hudson; Editing by Sophie Hares)

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