January 24, 2014 / 10:47 AM / in 4 years

ECB's Visco says ready to act to head off deflation

DAVOS, Switzerland, Jan 24 (Reuters) - The European Central Bank is ready to use all its available tools - from further interest rate cuts to asset purchases - should the region’s currency bloc enter a deflationary spiral, ECB policymaker Ignazio Visco said.

In an interview with Reuters Television on the sidelines of a gathering of economic and business elite in this Swiss mountain resort, Visco said the euro zone was facing a substantial reduction in inflation rates, but not deflation.

“In a number of countries, we have a share of elementary items that have shown negative rates, and this share is sizeable but not comparable to the one seen in 2010, nor the ones seen in Japan,” said Visco, who is the governor of the Bank of Italy.

“So we are not there yet, but we are ready to use all the instruments we have to counter that” should the need arise, Visco said.

Visco said there was still room to intervene on interest rates, reiterating that Europe’s central bank was ready to consider negative deposit rates if needed.

In addition to pumping further liquidity into the economy, the ECB could also prop up prices by buying assets - a policy it embarked on in 2011, but not without controversy among policymakers.

“You can intervene on the asset side, and obviously this is another thing,” said Visco in the television interview. “We are not impeded from doing anything except violating the (EU) treaty, so we cannot purchase treasury bonds directly, and we will not.”

In 2011, the bank bought Italian and Spanish bonds under its Securities Markets Programme (SMP) only for Italy’s then prime minister, Silvio Berlusconi, to go back on reform promises he had made to get the ECB to step in.

The experience led the ECB to attach conditions to its new bond-buying program, the yet-to-be used OMT plan.

Peter Praet, the ECB’s chief economist, additionally raised the possibility last November of the ECB embarking on asset buys, or quantitative easing, just as the Fed begins to scale down its QE programme.

Other ECB policymakers are skeptical about this idea.

In Italy, Visco is inspecting the country’s banks ahead of an asset quality review that lenders across the euro zone are undergoing before the ECB takes over supervision of the region’s biggest banks.

Fifteen Italian banks will fall under the ECB’s supervision as of November of this year, but Visco has repeatedly called on all Italian lenders to reduce their level of soured loans.

Visco declined to say how much of a capital shortfall was likely to emerge from the inspections, confirming only that estimates from the International Monetary Fund that the amount would be up to 1 percent of Italian gross domestic product.

He said the health check could lead to some Italian lenders merging, though the Italian central bank was not going to “design the map of aggregations or decide the way the market should go”.

“Our major concern is that banks remain safe and prudent, and secondly, in doing this, that the governance of banks is improved,” he said. Visco added that the asset quality review could become the “U-turn” Italy needs to breath life into its cash-strapped businesses and households. (Reporting by Alessandra Galloni; Editing by John Stonestreet)

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