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Dijsselbloem in 'self-fulfilling' deflation warning

President of the Eurogroup, Jeroen Dijsselbloem, warned on Thursday that deflation fears plaguing the euro zone could become a "self fulfilling prophecy" as investors grow increasingly wary.

Speaking ahead of the European Central Bank (ECB)'s interest rate announcement and news conference, Dijsselbloem, the head of the group of euro zone finance ministers, said the Bank had "grounds to act", as inflation was moving in the wrong direction.

Euro zone inflation fell unexpectedly to 0.5 percent last month, intensifying pressure on Mario Draghi, President of the European Central Bank, to act against the rising threat of deflation.

ECB President Mario Draghi announced a host of stimulus measures on Thursday, including cuts to its key interest rate and the rate on its marginal lending facility, as well as a negative rate on its deposit facility.

Draghi also unveiled the launch of longer-term refinancing operations (LTROs), in which the ECB lends to banks at low interest rates, in order to encourage them to lend to households and non-financial corporations.

In addition, he said the ECB had undertaken "preparatory work" in order to conduct Federal Reserve-style asset purchases in the asset-backed securities (ABS) market.

Furthermore, Draghi said the ECB would cease sterilizing the liquidity injected from its Securities Markets Program. The program involved the purchase of bonds from troubled "peripheral" euro zone countries.

Dijsselbloem, who is also the finance minister of the Netherlands, told CNBC: "The ECB have a mandate, they have to make sure that in the mid-term the inflation stays close to the two percent target—it is not going in that direction, so there seems to be grounds to act."

Jeroen Dijsselbloem
PETRAS MALUKAS | AFP | Getty Images
Jeroen Dijsselbloem

The euro zone's inflation reading is well below the ECB's target of just under 2 per cent and on a par with March, when it hit its lowest level since autumn 2009.

However, in his speech, Draghi disagreed with Dijsselbloem's concerns that the euro zone could be entering a self-fulfilling deflationary spiral.

Dijsselbloem warned that euro zone deflation issue cannot be tackled by ECB intervention alone.

"What the ECB can do will help I am sure, but it cannot just come from the ECB. National government and joint co-operation in the Eurogroup has to stay strong," he said.

Craig Moseley | CNBC

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Turning to a potential $10 billion-plus fine the U.S. may impose on French bank BNP Paribas, following a criminal probe on whether the lender broke U.S. sanctions on Iran, Sudan and Cuba, Dijsselbloem said it was "over excessive".

"I do think we have to... find grounds for international harmonization on the level of the fines. If a bank has messed up they should be fined, don't get me wrong. But the height of the fine seems to be over excessive and it's not helping the recovery of the banks," he said.

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