ECB sees no signs of deflation, recession in eurozone

The European Central Bank sees no signs of deflation or recession in the single currency area, but will remain vigilant, its chief economist said in a newspaper interview on Tuesday.
"We can't ignore the feeble economic climate. We are now seeing a loss of momentum," Peter Praet told the Belgian newspapers Tijd and L'Echo.
"It is striking that growth is abating in an early phase of the business cycle. We take that seriously, but we shouldn't exaggerate -- our base scenario for a gradual economic recovery is still realistic," Praet said.
Asked whether the 18 countries which share the euro are on the verge of a new recession, Praet replied: "No, I wouldn't say that."
"Confidence indicators for the third and fourth quarter suggest marginal growth in the euro area. That is rather worrying, as the momentum is certainly not strong enough for self-sustaining growth."
Similarly, the risk of deflation -- a disastrous downward spiral of falling prices -- was  "limited," Praet said.
"I find it difficult to accept the high probability of deflation (30 percent) published by the International Monetary Fund for the euro area. Our models come up with much lower figures. But we do need to be vigilant," Praet said.
"If you're hovering close to zero and you experience a new shock, the risk of negative inflation is by no means negligible."
The ECB has cut interest rates to all-time lows and drawn up programmes to pump cash into the economy, but is prepared to take further action if necessary, Praet said.
"We already further loosened monetary policy in June and September. We do not feel comfortable with the current low level of inflation and are closely monitoring the path of inflation."
"If we need to counter the risk of a prolonged period of low inflation, the governing council is unanimously prepared to take unconventional measures. The debate on the need for extra measures still lies ahead." he said.
On Sunday, the ECB published the results of its year-long audit of eurozone banks, giving the large majority of them a clean bill of health.
The central bank hopes that the success of the exercise will provide a boost to lending in the euro area.
On its own, the audit "is not sufficient to restore credit provision, but it is a minimum condition," Praet said.
"The test, together with the balance sheet repair measures of the banks, should have an impact on credit provision in the euro area and thus be supportive to economic recovery, as banks will be able to access funding more easily, given that investors now have a clear picture and transparency has been improved," he said.