Europe Economy

Threat of euro zone deflation not rising: Bank of Italy

Alessia Pierdomenico | Bloomberg | Getty Images

The euro zone is likely to escape the threat of outright deflation this year, the head of Italy's central bank told CNBC on Saturday, but he warned of "very, very low inflation" ahead.

Ignazio Visco, the Bank of Italy governor, made the comments in an exclusive interview just days after the European Central Bank (ECB) downgraded its inflation forecasts for the year. Currently, the ECB sees inflation at 1.1 percent next year, below its June forecast of 1.5 percent. The central bank also expects economic growth in 2016 of 1.7 percent, versus its June forecast of 1.9 percent.

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Visco—also a member of the ECB's governing council—also echoed the comments made by ECB head Mario Draghi on Thursday. Draghi said that the central bank could expand its asset purchase program— or quantitative easing (QE) beyond the original deadline of September 2016, if circumstances required. Regardless, the Bank of Italy head said that QE is definitely working.

On the sidelines of the G20 summit in Ankara, Turkey, Visco told CNBC that, "...if by end of September next year we still think it is needed to keep it going because the objective is not really reached, we will go and keep it going."

He added: "For the time being we are very very determined to continue to purchase at the pace that we have been doing, and we have not seen difficulties in that," Visco said.

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"Now they have come back again, and so I think that these, and our determination to keep going until we reach the objective," should anchor price expectations in the near term, he added.

Visco added that the threat of deflation was there but instead Europe will see "very, very low inflation" this year, followed by an increase next year.

"The overall uncertainty and reduction in demand in emerging economies is to an extent compensated by an improved situation in the U.S.," the central banker said.

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The summer has also seen the euro zone economy come under renewed pressure, with second quarter gross domestic product (GDP) growth coming in below expectations at 0.3 percent, according to the European Union's official statistics office.

Additionally, the Greek debt crisis, which saw the country come to the brink of leaving the euro and taking a third bailout package, also weighed on the currency bloc's confidence.

Visco, however, insisted these factors would not push the euro zone into deflation territory.

"The Greek crisis clearly has produced a lot of volatility, and with volatility we had some difficulties also in terms of interest rates and exchange rate levels which have moved back—not towards the levels they had when the [bond buying]program was announced," Visco told CNBC.