February 25, 2014 / 3:59 PM / 5 years ago

Euro zone inflation could stay low to 2016: Nowotny

VIENNA (Reuters) - Inflation in the euro zone could stay well below the European Central Bank’s target until 2016, ECB policymaker Ewald Nowotny told an Austrian newspaper.

Reiterating that he saw no prospects of deflation in the euro zone, Nowotny told the Wirtschaftsblatt: “Overall we see ourselves confronted with inflation levels clearly under 2 percent for the euro zone perhaps until 2016.

“That is below the ECB price target of 2 percent, so we are in a low price environment but certainly not in deflation,” he added in the interview, which the paper released on Tuesday ahead of publication on Wednesday.

Nowotny said some countries, especially in the south, were seeing falling price levels but “I would tend to see this as part of a necessary adjustment process”.

JP Morgan analyst Malcolm Barr, in a research note, said he viewed the adjustment argument as the ECB rationalizing its policy inaction rather than as a persuasive argument.

Barr added that there appeared to be an “absence of a policy tool the ECB is comfortable with deploying in order to keep the inflation path up to the objective.”

The ECB holds its next policy meeting on March 6, when the Governing Council will have at its disposal new forecasts from the bank’s staff that will stretch into 2016 for the first time.

Nowotny was speaking as the European Commission forecast euro zone inflation of just 1.0 percent this year and 1.3 percent in 2015.

Asked what steps the ECB could embrace to avoid deflation and if negative rates were possible, he said:

“The ECB meeting at which we will discuss such measures takes place next week. I think one must be realistic about what individual measures can affect. For psychological reasons I am skeptical about negative interest rates.”

He noted that banks that place short-term deposits at the ECB already get zero interest. “They would not change their behavior even with a negative interest rate, which cannot be very high, perhaps 10 basis points. The negative interest rate would thus be a kind of insurance premium.”

One possibility to promote lending would be to accept asset-backed securities as collateral, he said.

Nowotny, who is also head of the Austrian central bank, declined to speculate on whether Austrian banks would need to raise more capital as a result of reviews of their balance sheets, which he called “a strict and demanding process.”

But, asked if there could be nasty surprises, he said: “I would not see that at this stage.”

Reporting by Michael Shields; Editing by Paul Carrel/Mark Heinrich

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