By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Olli Rehn on Friday warned that the balance of risks now includes a meaningful chance that euro area inflation comes in below forecast, citing softer underlying price pressures, easing wage momentum and disinflationary forces from the exchange rate and trade.

Rehn, who heads the Bank of Finland, wrote in a blog post on the central bank’s website that there was “a real risk of lower-than-expected inflation,” calling January’s data “a small sign” of that possibility.

Pointing to the composition of the slowdown, he said moderation in core inflation “allays concerns about the resilience of wage and services inflation,” adding that both services and manufactured-goods components eased.

Forward-looking indicators, he wrote, “point to a clear slowdown in wage developments,” which would be expected to damp service-price inflation in particular.

On activity, he argued that the euro area economy has remained resilient, with growth continuing despite geopolitical turmoil and recent data coming in “even slightly stronger than forecast,” while still characterized as “positive but subdued.”

He said household caution was restraining consumption and listed downside growth risks including the possibility that exports fail to keep pace with global trade and saving rates remain high.

Rehn also sketched upside scenarios, writing that large-scale investment in defense and infrastructure could materialize more strongly than expected and that the economy could again prove more resilient than assumed.

On inflation risks in the other direction, he pointed to the recent rise in energy and industrial metal prices, warning that a sustained increase could push consumer prices higher than forecast, particularly if growth accelerates.

At the same time, he wrote that the strengthening of the euro and “the increase in cheap Chinese imports” could weigh on underlying inflation with a lag and, if persistent, affect the euro area’s competitiveness.

Rehn said policy would remain “meeting by meeting” and stressed readiness to respond if geopolitical developments deliver further “unpleasant surprises,” adding that future interest-rate changes, “if justified, are not excluded.”

He also urged structural reforms to lift longer-term growth potential, arguing that “resilience is not the same as success.”