By Balazs Koranyi and Marja Novak
FRANKFURT (Reuters) - Euro zone growth has stabilized and the European Central Bank's recent stimulus scheme is working as intended, even if markets may still need more time to fully grasp the scope of the package, Slovenian central bank chief Boštjan Vasle said.
Euro zone growth has slowed sharply over the past year and a long predicted rebound has failed to materialize, raising fears that the bloc could fall into recession, forcing the ECB to provide even more stimulus despite years of unprecedented support.
"I do not see any reason for a further change in growth prospects," Vasle told Reuters in an interview. "The (economy) is developing in a way which was predicted in our latest projections; at the moment things are under control, going in a direction which is not unexpected."
He added that data from industry and trade suggest that weak growth may continue into the first half of next year but signals from services and the labor market were more positive.
The ECB cut rates deeper into negative territory in September and launched an indefinite bond purchase scheme to lower borrowing costs and spur growth, all with the ultimate aim of generating inflation.
Vasle acknowledged that the ECB's policy space is limited, putting a greater burden on fiscal policymakers but said that the ECB still had some room to act, if needed.
"We are in a situation where the business cycle is in the late phase, the economic situation is deteriorating and our monetary policy is quite stretched at the moment," Vasle added.
"What we decided in September, is working," he added. "If the situation changes, there is still room to go in that direction (of lower rates)."
Bond yields and some market interest rates have increased since the ECB unveiled its stimulus package but Vasle said this was not worrisome and financing conditions are still quite easy, supporting the ECB's aim to raising inflation back to just below 2 percent, a mark it has undershot since 2013.
"Part of the explanation (for higher yields) lies in the underlying economic situation and part of it is related to the fact that our measures are for the longer term," he said. "It’s been too short of a time to judge the impact since we adapted the package."
The ECB has long argued that the burden for raising growth now falls on governments and they should boost productivity and spend the cash saved from to lower central bank interest rates.
Governments have been slow in responding, however, as they focus on their national interests, firming the case for a euro area fiscal instrument that could be used during similar situations, Vasle argued.
"We took big steps (with the monetary policy) but we came to a point when we need cooperation of other policies, as well," Vasle said.
"Governments have different goals as opposed to ECB," Vasle said. "In a way the lack of action is understandable and that's why I am supporting the fiscal instrument on a euro area basis which would be designed exactly for this purpose to have a counterpart on the fiscal side with enough capacity."