UPDATE 1-Central banks must contain threat from low prices -Noyer

Mon Mar 10, 2014 6:59am EDT

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PARIS, March 10 (Reuters) - Price stability is under threat in major economies from low inflation, warranting action by central banks, ECB policymaker Christian Noyer said on Monday.

Noyer, the governor of the Bank of France, warned that "permanent and deep forces" were weighing on inflation in the euro zone and wider world.

"Monetary policy should remain active because persistently low inflation threatens the achievement of price stability as commonly defined by all major central banks today," Noyer told a conference at the French central bank.

Noyer cited slack in many economies as a source of low inflation, as well as deleveraging in the euro zone, where many countries are slowly working off excessive debt.

"The recent appreciation of the euro has had indeed a strong disinflationary impact," Noyer added. The euro rose in recent days to 1.39 to the dollar, its highest since late 2011, after the European Central Bank left its monetary policy unchanged on Thursday.

The Eurostat EU statistics agency estimated euro zone inflation held steady in February at 0.8 percent, well below the ECB's target of close to but less than 2.0 percent.

Noyer said he did not currently see deflation - what he described as a "pernicious spiral" downward in prices that chokes consumption and investment - in the euro zone and that inflation expectations were firmly anchored in positive territory.

The ECB's inflation target was meant to provide a cushion against negative shocks to the economy that could drive inflation lower, Noyer said. The euro zone was vulnerable without a buffer, he said.

Against that background, the ECB's Governing Council has made it explicit that its members expect to keep interest rates at current or lower levels for an extended period of time.

Such forward guidance is a relatively new tool the ECB has called on to influence the economy. Noyer said it was unlikely central banks would go back to relying solely on their conventional tool, short-term interest rates.

But even with more levers available to central banks than in the past, Noyer warned that there were limits to what monetary policy could do.

"The longer interest rates are kept at low levels, the greater the risk for financial stability," he said. (Reporting by Leigh Thomas; Editing by Larry King)

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