REUTERS SUMMIT-UPDATE 1-ECB bond-buying intact and ready after court decision-Coeure

Wed Feb 12, 2014 12:15pm EST

(Adds more Coeure quotes from interview)

* Says OMT status is not changed; ready if needed

* ECB considering negative deposit rate very seriously

* No mechanical link between staff forecasts and policy

* See no deflation; see inflation returning slowly to 2 pct

By Paul Carrel and Eva Taylor

FRANKFURT, Feb 12 (Reuters) - The status of the European Central Bank's flagship crisis-fighting tool is unchanged after the assertion of Germany's top court that it exceeded the bank's mandate, ECB Executive Board member Benoit Coeure said.

Speaking to Reuters as part of a series of interviews with top policymakers across the euro zone, Coeure said the ECB had no need to use the so-called Outright Monetary Transactions (OMT) programme now.

Germany's top court will refer a complaint against the OMT to the European Court of Justice but, in an apparent effort to direct the ECJ's deliberations, it said last week the plan appeared to violate a ban on the ECB funding governments.

"The status of the OMT is not changed. It is ready to be used but it is highly unlikely it would have to be used at the moment," Coeure said.

The OMT, announced by President Mario Draghi in September 2012 at the height of the sovereign debt crisis and as yet unused, is widely credited with pulling the euro zone back from the brink.

Its power lies in the promise of potentially unlimited sovereign bond purchases - a prospect that calmed fears about the currency area zone falling apart and backed up Draghi's vow to do "whatever it takes" to save the bloc.

The decision by the German Constitutional Court has left investors asking questions about the validity of the OMT. The head of Germany's ZEW economic think tank said on Monday the measure had been seriously weakened.

With the prospect of the euro zone breaking up having receded sharply since 2012, the ECB is now more focused on weak price pressures in the bloc, where inflation is running at just 0.7 percent - well below its target of just under 2 percent.

"We're not seeing deflation in the euro zone," Coeure said. "We see low inflation, slowly increasing from the current low levels back to 2 percent."

The discussion around price pressures was about "how low can inflation be without triggering adverse dynamics", he said. "We are not there, but we have to be alert that negative shocks could trigger that kind of scenario and then we have to be ready to react."

Much of the low level of inflation could be explained by weak demand, Coeure said, adding: "But we see positive news coming from this side. We see aggregate demand now developing in the euro zone."

NEGATIVE RATES

To help money flow more evenly across the currency area, Coeure said the idea of cutting into negative territory the rate the ECB pays banks to hold their deposits overnight was "a very possible option".

"That is something we are considering very seriously. But you should not expect too much of it," he said of a negative deposit rate.

Coeure did not favour tying the ECB's forward guidance on low interest rates to specific thresholds or triggers.

The ECB left policy on hold last week but President Mario Draghi put markets on alert for possible action in March, saying the Governing Council would have more information at its disposal by then, including new forecasts from the bank's staff that will extend into 2016 for the first time.

However, Coeure said: "There is no mechanic link between the staff forecasts and Governing Council decisions. It will depend a lot on our understanding of the forces that are at play in the euro zone economy and these are complex forces."

The ECB would closely follow turbulence in emerging markets, though it was too early to say whether this could change the central bank's outlook for growth and inflation.

"We haven't seen that much of a spillover effect on the euro zone so far, which is grounds for cautious optimism."

Coeure took over this month as the ECB's top negotiator in Brussels, taking on the key portfolio in a board reshuffle following Joerg Asmussen's departure. He also remains in charge of market operations, which would include running the OMT.

One element that would foster stronger euro zone economic growth is a revival in still moribund bank lending.

Coeure said the ECB's asset quality review (AQR), part of a series of health checks it is running on euro zone banks before taking over as supervisor of the financial sector later this year, could prompt banks to shed more assets.

"There is a risk that we will see another wave of deleveraging when the AQR results are known," he said.

"My personal plea to supervisors would be that this (adjustment) will be done through raising capital rather than by cutting loan books." (Additional reporting by Sakari Suoninen and Andreas Framke. Editing by Mike Peacock)

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