January 19, 2015 / 7:31 AM / in 4 years

Nowotny says ECB has limited options for more action: paper

Austrian National Bank Governor Ewald Nowotny listens during a news conference in Vienna December 15, 2014. REUTERS/Heinz-Peter Bader

VIENNA (Reuters) - The European Central Bank has limited options left to counter long-term stagnation in the euro zone, ECB Governing Council member Ewald Nowotny was quoted as saying in an interview published on Monday.

The ECB faces a crucial test of its resolve to do “whatever it takes” to preserve the euro when it decides this week on buying government bonds to combat deflation and revive the economy.

Asked to what extent the ECB’s arsenal was exhausted and what it could still do, Nowotny told Austrian newspaper Tiroler Tageszeitung: “Our possibilities are limited.” He did not elaborate.

Inflation in the euro zone is well below the ECB’s mid-term target of just under 2 percent but Nowotny said he did not expect a protracted period of deflation.

“We had negative inflation rates in December and perhaps we will have them in the first months of this year, but I do not believe we can expect deflation for 2015 overall. But the margin of safety has become smaller,” he was quoted as saying in the interview.

Asked if it would be difficult to pull out of deflation if it set in, he said yes.

“We see the danger from Japan, which for two decades has low growth, low inflation and low interest rates, thus long-term stagnation. For Europe, lasting low growth is not a (desired) prospect,” he said.

“That would be linked to massive negative effects on the labor market. And it would certainly have dangerous political and social impact.”

Reporting by Michael Shields; Editing by Susan Fenton

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