ECB's Visco says policymakers must counter deflation risk

Ignazio Visco, governor of Bank of Italy, speaks during an event to launch the private finance agenda for the 2020 United Nations Climate Change Conference (COP26) at Guildhall in London

ROME (Reuters) - European Central Bank Governing Council member Ignazio Visco said on Friday policy makers had to head off deflationary risks from the abrupt halt to economic activity in the coronavirus lockdown as data from Italy showed prices fell in May.

Visco, who is also governor of the Bank of Italy, said disinflationary pressures could be strong and persistent, threatening economies where already high levels of public debt are growing massively during the crisis.

Presenting the Bank of Italy's annual report, he said the ECB was ready to use all the instruments available to ensure that every sector of the economy could benefit from accommodative financing conditions.

"Steps must be taken to counter the significant risk of low inflation and the marked fall in economic activity from translating into a permanent reduction in expected inflation or into the possible resurfacing of the threat of deflation," he said.

"Also as a result of the high levels of public and private debt in the euro area as a whole, this could trigger a dangerous spiral between the fall in prices and that in aggregate demand."

The comments came as statistics agency ISTAT said Italian EU-harmonised consumer prices fell a preliminary 0.2% year-on-year in May, pushing the country into deflationary territory.

The agency also reported that Italy's economic output contracted by 5.3% in the first quarter of the year, the steepest quarterly fall in gross domestic product for at least 25 years, sharply revising down a preliminary estimate of -4.7%.

Visco said he expected the contraction would be even more marked in the second quarter, which included more days covered by the coronavirus lockdown.

Visco said measures adopted by authorities including the ECB had succeeded in easing market tensions and the closely watched spread between the yields on Italy's BTP bonds and their German equivalents had narrowed after jumping sharply in March.

He noted however that the yield spread, one of the major indicators of how markets judge the relative risk between different countries, was still wider than the equivalent spread on Spanish and Portuguese bonds.

Visco said the difference was not justified by economic fundamentals and stated that the sustainability of Italy's public debt was not in question. But he added that the uncertainty could only be removed by economic policies aimed at restoring competitiveness over the long term.


(Reporting by James Mackenzie, Valentina Za, Stefano Bernabei, Giuseppe Fonte; Additional reporting by Gavin Jones; Editing by Frances Kerry)