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Inflation will pick up but risks remain: ECB official

Tuesday, 26 Nov 2013 | 1:20 AM ET
Negative deposit rate is a possibility: ECB's Coeure
Tuesday, 26 Nov 2013 | 3:20 AM ET
Benoit Coeure, executive board member of the European Central Bank, says a negative deposit rate is a possibility but it is only "one tool in the toolbox".

Slowing price growth in Europe is likely to reverse, according to a senior European Central Bank (ECB) official, who said the central bank is ready to tackle any possible disinflation.

"We don't see it as a very likely prospect that disinflation would worsen in the euro zone as growth recovers, which is our main scenario," Benoit Coeure, an executive board member of the European Central Bank told CNBC in an exclusive interview on Tuesday .

"Inflation will pick up gradually and will come back to the 2 percent target of the ECB."

(Read More: ECB's Draghi: Nothing new on negative deposit rates)

The ECB has warned of deflationary pressures - when the price of goods and services start to decrease. The danger is people expect falling prices and become reluctant to spend and borrow. That would make it hard to get the economy moving again.

It has yet to materialize but disinflation - when price growth stops increasing and decreases - has been seen in recent figures.

The ECB announced on November 7 a quarter-point cut in its main refinancing rate to a new record low of 0.25 percent. It followed surprisingly low inflation data which sparked concerns that the 17-country euro zone was heading for a period of deflation.

Coeure's belief that inflation will pick up again correlates with the market view, with a Reuters poll predicting that the first estimate of inflation data this month, published on Friday, will show a slight upward movement to 0.8 percent from 0.7 percent.

Nonetheless, Coeure added that the Bank is ready for any alternative outcome.

ECB could ease further: BayernLB's Daheim
Marius Daheim, senior government bond analyst at BayernLB, says the European Central Bank could further ease monetary policy.

"We have seen inflation coming closer to zero, we have this safety buffer that protects us from entering into the danger zone when it comes to the inflation numbers and we will be monitoring very closely these numbers," he said. "The Governing Council has been very careful saying that it's ready to keep rates at a low level for an extended period of time, and if necessarily lower if we see this safety buffer further eroded."

He echoed President Mario Draghi's comments on negative deposit rates - when banks are charged for depositing cash at the ECB - saying they are a possibility. This has been "technically investigated, legally investigated," he said, adding that it was only one instrument in the tool box.

(Read More: Currency wars: Is the euro losing the battle?)

Coeure also supported Jens Weidmann's view that European sovereign bonds should be correctly risk weighted. Governing Council member and Bundesbank chief Jens Weidmann holds the view that banks' sovereign debt holdings should not be treated as a risk-free asset in an effort to combat a "doom loop".

European banks, throughout the crisis, have bought up sovereign debt of their home countries, which is given a risk-free weighting under Basel capital rules. Weidmann has stated that this doesn't encourage market discipline and giving sovereign bonds a true rating would help solve the euro zone crisis.

Coeure said that this discussion would have to take place with officials in Basel, but conceded that banks shouldn't rely too much on sovereign debt.

"That is a general principle that deserves being supported," he told CNBC. He added that it will be looked at very carefully as part of the ECB stress tests that are starting this month.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

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