ECB’s Constancio Says No Deflation Seen as Recovery Gains

The euro area will probably avoid outright deflation as a “soft” economic recovery gradually reduces spare capacity in the economy, European Central Bank Vice President Vitor Constancio said.

“The prospects for inflation are a cause for concern,” Constancio said at a press conference in Athens yesterday, two days after figures showed euro-area inflation slowed in March to 0.5 percent, the lowest level in more than four years. “If indeed the recovery consolidates, it means that the slack in the recovery is reduced, and that will help on that score.”

The Frankfurt-based ECB meets tomorrow for its monthly monetary-policy meeting against a backdrop of improving economic data with gains in prices lagging behind. ECB President Mario Draghi predicts that the recovery will eventually push inflation back toward the ECB’s target of just below two percent.

“We expect the low figure in March will be corrected to a high figure in April,” Constancio said. “We see no deflation prospects, that this regime of low inflation could lead to real deflation. We don’t expect that at all.”

At the same time, Constancio said the recovery is still vulnerable to negative influences from outside the euro area, and the region could experience slow price gains for some time.

“There is a recovery although a soft recovery and there are downside risks, not just because we may have shocks coming from geopolitical risks,” he said. “Europe can be, and in particular the euro area, in a protracted period of low inflation.”

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