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ATHENS, Dec 28 (Reuters) - The risk of deflation in the euro zone is negligible and if price stability risks subside further monetary policy loosening would be warranted, European Central Bank Vice President Lucas Papademos said in a newspaper interview on Sunday.
"As regards the future, risks to price stability seem to be balanced but may show a downward trend. If this projection is confirmed, then further loosening of monetary policy is advisable," Papademos told Greek newspaper Kathimerini.
He said the ECB would "carefully evaluate" the economic situation and the prospects for price stability based on the latest data.
Papademos also told the paper he saw no visible risk of deflation in the euro zone, which he defined as a continuous fall in the price level for a long time. "There are many reasons why the risk of deflation is considered negligible. There is not a visible deflation risk on the horizon," he said.
"During 2009, the annual rate of euro zone inflation may drop sharply for a short period of time due to the impact from oil prices and other commodities. Hence, the euro zone economy may experience a fast deceleration in inflation. However, if this happens, it will be short lived and consequently not considered a case of deflation," Papademos said.
Among the reasons for the low risk of deflation, he cited the relative inflexibility of euro zone labour markets in setting nominal wages, with the average wage increase seen at 2 percent next year.
Additionally, he said inflation expectations appeared stable at around 2 percent.
"We do not want inflation above 2 percent, but will also not allow it to fall much below 2 percent and stay at this level for a long time," Papademos said.
"Hence, the ECB will adjust its monetary policy accordingly if prospects for prices are not in line with its target -- the maintenance of inflation below but close to 2 percent."
Papademos defended the ECB's course of action thus far and said the central bank was not late in cutting interest rates as it considered up until the end of September that inflation risks were on the upside.
"The ECB was not late in lowering its rates. It acted promptly as soon as our evaluation on the prospects and risks of inflation changed. In fact, this assessment changed abruptly and this happened in early October," the ECB's number two told the paper.
Earlier this month the ECB sharply revised downwards the outlook on economic activity next year and cut interest rates by three quarters of a percentage point, its largest cut ever, to 2.5 percent.
"It is obvious that we cannot predict the future with certainty and the assessment of the economy's medium-term prospects during periods of turmoil is especially difficult," Papademos said. (Reporting by George Georgiopoulos; Editing by Jason Neely)