Italian business lobby warns on deflation

BRUSSELS: The head of Italy's main business lobby Confindustria warned on Wednesday that falling prices and a strong euro were threats to the country's economy, the day before the European Central Bank meets to decide on euro zone interest rates.

Italian consumer prices fell 0.3 percent in October, with the annual inflation rate dropping to a four-year low of 0.7 percent, surprising analysts who had expected inflation to accelerate on the back of an increase in value added tax (VAT).

"There is a very negative sign, and that is that despite the one point increase in VAT the latest data show inflation is falling. This means we are well and truly in a situation of deflation.

It is worrying," Giorgio Squinzi told reporters.Speaking in Brussels, Squinzi said Confindustria may soon cut its most recent forecasts for the euro zone's third largest economy, which projected a fall in gross domestic product of 1.8 percent this year and growth of 0.7 percent in 2014.

Italian inflation in October was exactly in line with that of the euro zone as a whole.

The 0.7 percent euro zone inflation rate is far below the ECB's reference level of below but close to 2 percent, fuelling expectations the bank may signal looser monetary policy at Thursday's meeting, or possibly even cut its key rate from the current level of 0.5 percent.

The strengthening of the euro has contributed to downward price pressures and created concerns among exporters, which Squinzi said he shared.

"I think the real exchange rate should be in the 1.25 to 1.30 area," Squinzi said, as opposed to the current rate of around 1.35. He added that further euro appreciation to the 1.38 or 1.40 range "would certainly be a brake on growth."

Italy, the euro zone's third largest economy, is struggling to emerge from its longest post-war recession and would welcome more monetary stimulus from the ECB.

Economy Minister Fabrizio Saccomanni said on Tuesday he expected the ECB would take current euro strength into account in its interest rate policy and had a role to play in supporting growth.