BANGALORE The threat of deflation across the euro zone is more serious than the European Central Bank claims, as austerity imposed on peripheral economies is already pushing prices lower, a Reuters poll of forecasters found on Thursday.
The ECB has played down the possibility of deflation in the 18-member bloc. But 22 of 46 economists, polled Feb 7-13, rated the risk as "somewhat serious" and eight said it was "serious." Fourteen said it was not serious and 2 said it was non-existent.
A growing minority now say the central bank is underestimating the threat but these economists don't have enough conviction yet to turn risks into actual forecasts.
The consensus view still points to inflation averaging 1.0 percent this year, unchanged from last month's survey, albeit well below the ECB's preferred 2 percent ceiling.
"Since Mario Draghi has said subdued inflation will persist for some time, we can infer that he has in effect suspended the close to, but below, 2 percent inflation objective," said James Shugg, economist at Westpac.
"The dominating issue has been how the ECB should respond to falling inflation."
In November, the ECB surprised most forecasters and investors by cutting the refinancing rate to a new record low of 0.25 percent. The deposit rate is already at zero.
The challenge now for the ECB is finding ammunition to address further falls in inflation.
Indeed, after pumping over one trillion euros worth of cheap loans into the banking system and having hardly any rate left to cut, respondents in the poll say the ECB's options are limited.
Only three economists expect the ECB to cut its deposit rate below zero - charging banks for keeping money with it.
That comes despite the fact policymakers have suggested it is a step the ECB could take to nudge banks into lending money instead of hoarding it.
ECB Executive Board member Benoit Coeure told the Reuters Euro Zone Summit on Wednesday that a deposit rate cut "is something we are considering very seriously. But you should not expect too much of it".
The five member countries with the weakest inflation - Greece, Cyprus, Portugal, Spain and Ireland - are those that had to take some form of bailout and with it painful austerity programs.
In Greece, prices fell by 1.8 percent in December on a year ago. In the euro zone as a whole, prices rose 0.7 percent in January, according to preliminary estimates, down from 0.8 percent in December.
Unemployment in these economies has soared as a result of spending cuts, further denting consumer demand. In Spain, the euro zone's fourth largest economy, unemployment runs at 26 percent.
ECB policymakers have dismissed any risk of the bloc entering the vicious cycle of falling prices which pushes consumers to postpone spending, in turn sending prices lower.
A separate ECB survey of professional forecasters published on Thursday also predicted a low risk of outright deflation over the next five years.
"Although the most likely scenario is that euro area-wide deflation will be avoided, the concern around low inflation there is not unwarranted," Goldman Sachs economists wrote.
Economists also left their estimates for 2014 and 2015 gross domestic product growth unchanged form the last poll at 1.0 and 1.4 percent.
(Polling by Sarbani Haldar and Ishaan Gera; Graphics by Vincent Flasseur; Editing by Ross Finley and Jeremy Gaunt)