November 30, 2016 / 12:00 PM / 8 months ago

UPDATE 1-Political uncertainty will feed into ECB decision, Hansson says

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TALLINN, Nov 30 (Reuters) - Political uncertainty will feed into the European Central Bank's policy decisions next week, ECB rate setter Ardo Hansson said on Wednesday.

The ECB meets to decide on the future shape and duration of its stimulus programme on Dec. 8. Four days earlier, Italy will hold a referendum that could unseat Prime Minister Matteo Renzi and plunge the country into political instability.

"There is still a lot of uncertainty right now," Estonian central bank governor Hansson told reporters on the sidelines of a conference. "It feeds into the outcomes. It feeds into future projections and feeds into the analysis."

Central bank sources have told Reuters the ECB is ready to temporarily step up purchases of Italian government bonds if the referendum results on Sunday drive up borrowing costs for the euro zone's largest debtor.

The ECB has tried to boost inflation and growth in the euro zone by stimulating lending through aggressive bond purchases, negative interest rates and free loans to banks.

But Hansson said that Europe's growth potential was capped by delays in reforms in some countries. That implies the core of the problem is beyond the reach of monetary policy and needs to be solved by governments instead.

"The problem is not so much lack of demand as poor growth potential," he said. "The problem lies on the supply side and all the delays in structural reforms in different countries. That's where the bottleneck is."

His remarks echoed comments today by ECB President Mario Draghi, who told the Spanish newspaper El Pais that the spread of populist movements is threatening European integration and efforts to find joint responses to the EU's shares concerns .

Euro zone inflation inched up to 0.5 percent in November, data showed on Wednesday, still well below the ECB's goal of just below 2 percent. (Reporting By David Mardiste; Writing by Francesco Canepa; Editing by Larry King)

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