* ECB's Noyer sees risks of low inflation
* ECB's Coeure doesn't see deflation, as economy is
* Disinflation could extend into the medium term
* ECB unexpectedly cut rates to record low this month
By Leika Kihara and Stanley White
TOKYO, Nov 25 European Central Bank Governing
Council member Christian Noyer said on Monday that interest
rates have to remain low for an extended period and might go
even lower if needed as officials try to ensure the euro zone
does not fall into deflation.
Central bankers have to invent policies to achieve price
stability if conventional monetary policy stops working, Noyer
said, suggesting the ECB will keep its options open after a
surprise slowdown in inflation.
"We see risks that low inflation will remain for some time,"
Noyer said at a conference in Tokyo.
"We will keep interest rates low for an extended period, or
even lower if need be, for price stability."
ECB executive board member Benoit Coeure said disinflation
in Europe is likely to continue for now, but will not progress
to deflation because the economy is recovering and inflation
expectations remain anchored around 2 percent.
A slowdown in inflation in the euro zone prompted the ECB to
cut its main refinancing rate to a record low of 0.25 percent
earlier this month. A more conservative minority at the bank
voted against this move, raising concerns about a split within
With the nominal benchmark interest rate approaching zero,
there are also concerns about whether the ECB has enough
ammunition to combat slowing prices.
The ECB's mandate is to keep inflation close to but below 2
percent. The central bank eased policy to prevent the slowdown
in inflation from lowering inflation expectations, Noyer said.
Recent wage cuts in some European countries are a welcome
adjustment for competitiveness, because this helps reverse a
trend where wages rose too rapidly, he said.
At the same time, the ECB does not want inflation to become
too low, because this could jeopardise price stability, Noyer
Coeure said that Europe's economy is stabilising and the
banking sector is strengthening, but policymakers need to make
progress with structural reforms to bring down unemployment and
encourage business investment.
With euro zone inflation running at 0.7 percent, well below
the ECB's target, several central bankers have said recently
they are open to taking new steps to prevent deflationary
pressure from harming the economic outlook.
SEEKING A 'SAFETY MARGIN'
In cutting the refinancing rate, "we did not act because we
see deflation risks materialising in the euro area," Coeure
said. "Rather, we acted because we wanted to keep a sufficient
safety margin above zero percent inflation."
Because the euro zone economy is growing again, inflation
will very gradually return to a level that is close to but below
2 percent, Coeure said, but added monetary policy alone cannot
ensure a sustained economic recovery.
Deep structural reforms are also needed to raise the
potential growth rate and avoid a vicious circle where low
growth expectations cause companies to delay investment, which
would further lower potential growth, he said.
Last week, ECB President Mario Draghi poured cold water on a
media report that the ECB was actively considering taking its
deposit rate - now at zero - into negative territory.
This move would see the ECB effectively charging banks a fee
to hold their money overnight, and could possibly encourage
banks to lend more, which could ease deflationary pressure.
The euro fell against the dollar and the yen last week after
the media report was published.