BERLIN, March 10 The chief economist of the
International Monetary Fund sees a risk of deflation,
particularly in the euro zone, German newspaper Handelsblatt
reported him as saying.
"The risk of deflation, especially in the euro zone,
definitely exists," Olivier Blanchard was quoted as saying in a
pre-publication copy of an article due to be published on
Inflation is running at 0.8 percent in the single currency
bloc, far below the European Central Bank's target of just under
2 percent. Last week ECB President Mario Draghi said the longer
it stays at such low levels, the harder it will be to get it
back up to the target.
Blanchard said deflation in countries like Spain and
Portugal was a double-edged sword: "On the one hand it would
certainly improve their competitiveness and help exports but on
the other hand it would increase the real interest rate and the
real value of debt and so reduce domestic demand."
He said there was a danger that the second effect would be
more dominant than the first and that would lead to lower
economic output and further deflation.
"Generally, longer periods of low inflation would make the
necessary adjustments in the euro zone more difficult," he said.
Blanchard also called on central banks to combat financial
"As soon as prices deviate from their long-term average
value, they should intervene. It's better to slow down what
could perhaps turn out to be a real estate boom than to let a
bubble form," he said.