* ECB has repeatedly signalled readiness to ease policy
* Low euro-zone inflation stirs debate about deflation risk
* Rate cuts on the cards but QE still some way off
By Stanley White
TOKYO, May 28 A European Central Bank meeting
next week could yield a combination of policies to tackle low
inflation and low credit growth, but the timing of the
implementation could vary, ECB Executive Board member Yves
Mersch said on Wednesday.
When asked about the chance of a cut in the ECB's three main
interest rates, Mersch said he assumes the differential between
the rates, which is called the corridor, will be maintained
because narrowing the corridor could harm interbank markets.
Mersch also said that he did not see deflation on the
horizon for the euro-zone but the central bank was preparing for
this contingency just in case.
Other ECB officials have made similar reassurances on
deflation, but there are worries that downward pressure on
prices has become entrenched after the financial turmoil and
spiralling jobless rates caused by Europe's debt crisis.
"Expectations have been raised because we have made it
public that we are comfortable acting with both conventional and
unconventional measures," Mersch told reporters on the sidelines
of a conference at the Bank of Japan.
"What we've been doing is broadening our tool box and we
will present some of these findings to the Governing Council."
ECB President Mario Draghi said after the ECB's May meeting
that the Governing Council was "comfortable with acting next
time" - its June 5 policy meeting - but wanted to see updated
economic projections from the bank's staff first.
He said he expected inflation, now running at 0.7 percent,
to slowly return to the ECB's target of just under 2 percent.
Reuters reported earlier this month that the ECB is
preparing a package of policy options for its June meeting,
which includes cuts in the deposit rate, the main refinancing
rate and the marginal lending rate.
The main refinancing rate is currently 0.25 percent and the
marginal lending rate, or emergency borrowing rate, is 0.75
The deposit rate currently stands at zero, so taking it into
negative territory would mean charging banks for parking their
money at the ECB overnight.
ECB officials have said that a negative deposit rate is an
option, and Mersch's comments suggest that if the ECB takes this
route, it will cut all three rates by the same margin to
maintain the corridor and avoid damaging money markets.
Other tools on the shelf include an injection of cheap
long-term funds with pricing linked to an increase in net
lending and preparing targeted measures aimed at boosting
lending to smaller firms.
The ECB is crafting policy options to prevent volatility in
the short-term money market from harming longer-term funding and
ensure proper functioning of the credit channel in the
euro-zone, Mersch said.
The euro exchange rate is playing a more important
role for prices as inflation is very low, but the ECB is not
targeting the exchange rate to boost competitiveness, Mersch
(Editing by Kim Coghill)