SAN FRANCISCO, Jan 4 (Reuters) - European Central Bank Vice President Lucas Papademos said on Sunday that further euro zone interest rate cuts may be warranted to prevent economic recession from spilling into a damaging deflation.
'If the downside risks to price stability increase, for example, if the impact of the ongoing financial market adjustment is greater than currently expected, an easing of monetary policy could be warranted in order to keep inflation over the medium term at levels consistent with price stability, that is below but close to 2 percent,' he said.
Papademos was speaking on a panel discussion on the euro common currency during the annual meeting of the American Economics Association in San Francisco.
He noted that the ECB had already reduced its benchmark interest rates by 1.75 percentage points in the past two months, but stressed that he did not believe that the region would slip into deflation. The ECB's benchmark rate is now at 2.5 percent.
'In the euro area, although inflation could drop considerably around the middle of this year -- the exact amount depending on future oil price developments -- it is currently projected that price developments over the medium term imply that the risk of deflation, that is, a protracted decline in the price level that would be embedded in inflation expectations, this risk is nil,' he said.
'This assessment is confirmed by market-based inflation expectations implicit in inflation swaps,' Papademos added.
(Reporting by Alister Bull, editing by Leslie Adler) Keywords: ECB PAPADEMOS/ (alister.bull@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
'If the downside risks to price stability increase, for example, if the impact of the ongoing financial market adjustment is greater than currently expected, an easing of monetary policy could be warranted in order to keep inflation over the medium term at levels consistent with price stability, that is below but close to 2 percent,' he said.
Papademos was speaking on a panel discussion on the euro common currency during the annual meeting of the American Economics Association in San Francisco.
He noted that the ECB had already reduced its benchmark interest rates by 1.75 percentage points in the past two months, but stressed that he did not believe that the region would slip into deflation. The ECB's benchmark rate is now at 2.5 percent.
'In the euro area, although inflation could drop considerably around the middle of this year -- the exact amount depending on future oil price developments -- it is currently projected that price developments over the medium term imply that the risk of deflation, that is, a protracted decline in the price level that would be embedded in inflation expectations, this risk is nil,' he said.
'This assessment is confirmed by market-based inflation expectations implicit in inflation swaps,' Papademos added.
(Reporting by Alister Bull, editing by Leslie Adler) Keywords: ECB PAPADEMOS/ (alister.bull@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.