(Refiles correcting header)
* Remarks run counter to earlier ones about supporting
* Says lower inflation due mostly to falls in energy, food
* Bundesbank expects recovery to push inflation back up
By Patrick Graham
BERLIN, March 29 The euro zone is not in a
deflationary cycle and the European Central Bank (ECB) should
not overreact to a slowdown in inflation caused largely by
cyclical factors which should prove temporary, Bundesbank
President Jens Weidmann said on Saturday.
The comments from the head of Germany's central bank, also a
member of the ECB's governing council, follow remarks last week
which investors interpreted as a softening of long-held German
resistance to more radical action to support growth.
The ECB is running official interest rates at a record low
but unlike other major central banks has resisted calls to
follow that move with outright "quantitative easing" to pump
more money into the economy.
Weidmann said that about two thirds of the falloff in euro
zone inflation to 0.7 percent, the lowest since the economy was
deep in recession in 2009, could be attributed to falls in
energy and food prices.
"Monetary policy should respond to such factors only in the
event of second round effects," he told a conference in Berlin,
saying he would not talk about current monetary policy ahead of
the ECB's monthly policy meeting next Thursday.
"With regard to the rate of inflation at the moment, the
euro area is not in a self-enforcing downward spiral of price
decreases, which is nominally the definition of deflation," he
CONSUMERS NOT HESITATING
He said consumers were not delaying purchases in
anticipation of falling prices and the bank expected a recovery
to gradually push inflation rates back up.
"This is not to say that a protracted period of lacklustre
growth will not be an issue for policymakers," he said, noting
that he backed further structural reforms within euro zone
states and an unplugging of banks' credit provisioning to the
But Weidmann warned about the risk of running very low rates
for an extended period.
"It is obvious to me that extremely low rates are a risk to
financial stability," he said, saying companies may then get
used to lower rates.
"Eventually this might mean that a necessary structural
change fails to take place," he said, noting that this could sow
the seeds of the next financial crisis.
"Risks to financial stability may ultimately culminate in
risks to price stability," he said.
With investors firmly focused on whether the euro zone's
central bank will act to bolster a slow economic recovery,
Weidmann surprised financial markets last week by saying that
negative interest rates were an option to temper euro strength.
He also said then that buying loans and other assets from
banks to support the bloc was not out of the question. However,
he also said there was no need to act for now.
The Bundesbank has been a stern opponent of the ECB's
government bond purchase programmes, drawn up during the debt
crisis, saying they pushed it too far into the realm of
financing governments. That, argued the Bundesbank, was not the
(Additional reporting by Reinhard Becker; Writing by Madeline
Chambers; Editing by Tom Heneghan)