The eurozone risks falling into deflation, the International Monetary Fund (IMF) warned on Wednesday, blasting the currency bloc's institutions for their insufficient response to their debt crisis, according to dpa. Deflation - occurring when the inflation rate falls below zero - is seen as an economic liability because it discourages borrowing and investment and makes life harder for debtors - a scenario that would badly hurt eurozone strugglers like Italy, Spain or Greece. In the eurozone, there is "about a 25 per cent probability" of it happening by early 2014, the IMF wrote in its annual staff report on the currency bloc. The risk of deflation "is relatively low" in healthier economies like Germany, "but significant" in peripheral countries where it would be most damaging, the IMF said, stating that tax hikes "are masking more severe downward price pressures" in places like Italy. Earlier this month, the European Central Bank (ECB) cut interest rates to a historic low of 0.75 per cent - a step that normally increases inflationary pressures, thus reducing the likelihood of deflation. But the IMF urged it to do more. It advised the Frankfurt-based body to cut rates further, engage in quantitative easing, provide more liquidity to private banks, ease collateral rules for loans or buy more sovereign bonds of vulnerable eurozone countries. But the ECB is reluctant to go down that road. "With policy rates at historical lows, the ECB remains cautious on the benefits of further easing," the IMF report indicated. The ECB does "not expect strong disinflationary pressures," noting that a falling euro exchange rate could fuel new price rises; but it could countenance taking bolder steps "to prevent further contagion should the crisis escalate," the IMF said. The IMF also insisted on structural reforms, noting that far-reaching measures on labour and product markets, taxes and pensions "could raise (eurozone) output by 5 per cent over 5 years."
