* ECB to keep rates low well into euro zone recovery
* Stresses ECB's easing bias, ECB ready to act if needed
* Liikanen says inflation pressures "moderate"
* Period of low inflation may last longer than expected
(Adds further comments from Liikanen)
By Sakari Suoninen
HELSINKI, March 24 The European Central Bank
keeps a close eye on the euro exchange rate to see how it
affects inflation, and it stands ready to act if the inflation
rate appears headed in the wrong direction, ECB Governing
Council member Erkki Liikanen said on Monday.
The euro's exchange rate is not an ECB policy target, but it
has become increasingly relevant in the central bank's economic
assessment. A stronger euro could hamper the 28-country bloc's
recovery and weigh on already-low inflation.
"We look at foreign exchange as much as it has an impact on
inflation," Liikanen, who is also governor of Finland's central
bank, said at the presentation of its quarterly bulletin.
Liikanen called inflation pressures "moderate" and said the
ECB was "ready to take further decisive action" if needed.
Euro zone inflation stood at 0.7 percent in February, far
below the ECB's target for close to but below 2 percent. The ECB
expects inflation to rise slowly over the next couple of years
to 1.5 percent in 2016 and it sees only limited deflation risks.
Asked whether the ECB should ease policy further, Liikanen
stressed the ECB's easing bias. The bank's forward guidance says
it will keep rates low or even lower for an extended period.
"We assess the situation in each meeting," he said. "One has
to remember that we have a clear downward bias ... we have also
added to our communication the unused capacity in the economy,
and that monetary policy will remain accommodative well into
recovery. All this has made our communication very strong."
The ECB kept interest rates at a record-low 0.25 percent at
its March policy meeting and took no other measure to stimulate
the economy. That disappointed markets and pushed the euro to a
2 1/2-year high against the dollar.
Liikanen said it would be good to use a longer perspective
than just last month when looking at the exchange rate.
"Interest rate differentials between German and U.S. bonds
have increased. Another factor which I believe could have an
impact on the U.S. economy and also foreign exchange rate on a
long-term perspective is that growth there seems to be
stronger," he said.
The Bank of Finland said in its report the period of low
inflation may be longer than previously expected.
The outlook for the global economy had improved slightly,
Liikanen said. But he added that risks were on the downside,
especially in the short term because of the crisis in Crimea.
At the same time, financial-market confidence and bank
funding conditions had improved. The ECB's health check of the
bloc's largest lenders should provide an additional boost to
confidence, Liikanen said, though it was too early to sound an
As for his native country, Liikanen said Finland was going
through a serious structural crisis, and that the Crimean crisis
would have ripple effects on the already-weak economy.
"The fragility of the Russian economy - made worse by the
situation in Ukraine - and the contraction in foreign trade will
also weaken the Finnish economy," he said.
The Bank of Finland cut its growth forecast for Russia to
0.5 percent, saying that the crisis would slow Russian growth
for at least all this year, even if tension subsided quickly.
(Reporting by Sakari Suoninen; Editing by Larry King)