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By Paul Carrel
FRANKFURT (Reuters) - Modelled on the hawkish, inflation-fighting Bundesbank, the European Central Bank is used to focusing on containing price rises rather than worrying about them increasing too slowly - or even falling.
But now ECB policymakers are keenly aware that inflation in their 17-country euro zone risks slipping further below their target of just under 2 percent, even if they insist deflation is not a threat.
The concern - which will add to pressure for the bank to cut interest rates or take other "easing" actions - has been highlighted by a slide in Greek inflation to below zero.
So far Greece, which entered deflationary territory in March for the first time in 45 years, is an isolated case. But price pressures are weak elsewhere in the euro zone periphery once tax rises are discounted.
In Portugal, annual inflation is running at 0.5 percent, although Nordea analyst Holger Sandte calculates consumer price inflation measured at constant tax rates is just 0.3 percent there. It is at 0.7 percent in neighbouring Spain, he says.
"Given the recession, rising unemployment and tight fiscal policy in these countries, it would be no surprise at all to see rates below zero at least for a few months this year," said Sandte, one of a batch of analysts to put out research notes in recent days on the risk of a drift towards deflation.
Even in France, inflation slowed to 1.1 percent in March.
The concern about weak prices arises just as the Bank of Japan is embarking on an aggressive policy shift to try to end more than a decade of deflation and revive its ailing economy.
The ECB is not about to copy Japanese policy, confident that expectations are firmly anchored in line with its target.
Inflation expectations implied by government bonds, meanwhile, show no risk of a deflationary spiral on a 10-year view. The inflation expectations embedded in 10-year German and French inflation-linked bond prices are just below 2 percent.
The ECB is, however, alert to the weak demand issue in the periphery - those countries where much of the debt crisis has raged and where austerity policies pursued to meet bailout conditions and deficit targets have sucked any oomph out of the economy.
This portends deflation pressure.
"You look at today's unemployment rates, and you look at the fiscal policy going forward - it's tight and it's tightening. That points to deflationary risks going forward," said Andrew Bosomworth at PIMCO, the world's largest bond fund.
Unemployment is running at 27 percent in Greece, 26 percent in Spain, and 17 percent in Portugal. The rate for the overall euro zone is running at 12 percent.
In its monthly bulletin released on Thursday, the ECB reiterated its forecast for a gradual recovery in the euro zone later this year, but said risks to the outlook are on the downside and that it will monitor economic data "very closely".
"Monitor very closely" was one of the stock of coded phrases used by ECB President Mario Draghi's predecessor, Jean-Claude Trichet, to signal future policy actions, although it more often presaged an interest rate rise two months hence.
ECB policymakers have also been dropping hints that softer price pressures could prompt them to act. Executive Board member Benoit Coeure said last Friday the ECB will monitor inflation carefully as it threatens to sink further below target.
Both pillars of the ECB's monetary policy strategy - the economic and the monetary analysis - are showing weakness.
On the economy, board member Joerg Asmussen said on Tuesday there are more downside risks to a recovery in the second half of the year than a month or two ago. And in its April policy statement, the ECB said monetary expansion is subdued.
The limited scope many euro zone countries face for further indirect tax rises also points to inflation rates easing.
"That may well force greater urgency upon the ECB," Credit Suisse analysts said of the prospect of softening inflation, arguing that fading price pressures made it harder for the ECB to stick with its relatively unaggressive policy stance.
The main ECB interest rate is at a record low 0.75 percent, the highest level among the world's major central banks. But the bank worries that its low policy rate is not reaching all corners of the euro zone and is considering other options.
Last week, Draghi opened the way for the ECB to take fresh 'non-standard measures' - steps other than rate moves, such as sovereign bond buys or funding operations like the twin 3-year loans it offered banks just over a year ago.
"The chances of the ECB implementing new unconventional policy measures - as suggested by President Draghi in the press conference - look high," the Credit Suisse analysts added in a research note.
It was entitled 'Drifting towards deflation'.
(Additional reporting by Swaha Pattanaik. Editing by Jeremy Gaunt.)