Christine Lagarde warns euro zone over persistently low inflation

Monday 03 March 2014 19.01
Christine Lagarde said a prolonged period of low inflation "could derail the recovery"
Christine Lagarde said a prolonged period of low inflation "could derail the recovery"

IMF chief Christine Lagarde has urged the euro zone to fight persistently low inflation, warning that it presents a looming threat to economic recovery in the region.

Key risks menace the 18-nation euro zone even as it emerges from recession, the International Monetary Fund head told an economic conference in Bilbao, northern Spain.

Ms Lagarde said euro zone inflation was running well below the European Central Bank's target rate of just below 2% a year. 

Euro zone inflation was 0.8% in February, unchanged from January, according to the official statistics agency Eurostat.

"We see the risk of prolonged low inflation way below targets - targets being as you know just below two percent - looming," the IMF managing director said.

This "could derail the recovery", she warned.

Ms Lagarde had already warned in January of the risk of a return to deflation, which she described as "the ogre that must be fought decisively".

A broad, sustained fall in prices can lead shoppers and businesses to postpone purchases while waiting for prices to fall even further, potentially plunging an economy into a downward spiral. 

Ms Lagarde said ECB president Mario Draghi's July 2012 vow to do "whatever it takes" to protect the euro zone, and the central bank's successive interest rate cuts, had restored confidence and helped to tackle weak demand.

"We believe at the IMF that more can be achieved," she added.

"There is still room to manoeuvre that can be used with a view to bringing the inflation to target and with the view to procuring the creation of jobs."

The IMF boss said the euro zone was hampered by "unacceptably high" unemployment rates, especially among the young, and by high levels of private and public debt.

Ms Lagarde hailed signs of the euro zone's economic recovery, noting the "good news" conveyed by the IMF's forecast for economic growth in the region of 1% in 2014 and 1.4% in 2015.

She pressed the euro zone to create a "more complete" banking union, under which a central authority can bail out troubled institutions directly. 

Euro zone nations must create a "common backstop", she said, to pay for winding down failing banks.