* Mersch says sees no signs of deflation in euro zone
* Very low inflation for too long bears risks
* Weidmann says low inflation to last for some time
* ECB will watch euro moves closely -Weidmann
* But would be short-sighted to take one-dimensional view
(Recasts with comments from ECB's Mersch)
FRANKFURT, May 19 There were increasing signs on
Monday that the European Central Bank will add more stimulus to
the euro zone economy at its June policy meeting as inflation
remains stuck at very low levels.
ECB Executive Board member Yves Mersch said the likelihood
of policy action at the bank's next meeting had grown
substantially, warning about the risks of inflation staying very
low for too long, even though there were no signs of deflation.
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.
Since then, data has confirmed a slight increase in euro
zone inflation in April to 0.7 percent, from 0.5 percent the
previous month, but also shown that the economy grew much less
than expected at the start of the year.
"The likelihood that the Governing Council will already act
at its next monetary policy meeting in June has grown
substantially," Mersch said in the text of a speech for delivery
He said the Governing Council was unanimous in its
willingness to deploy both conventional and unconventional
measures to effectively counter the risks of very low inflation
over a longer period of time.
A too-long period of very low inflation risked unanchoring
long-term inflation expectations, Mersch said.
He described various deflationary risks, and added: "We see
no sign at the moment that such a deflationary scenario will
materialise in the euro zone."
Jens Weidmann, head of the German Bundesbank and who leads
the hawkish camp on the ECB Governing Council, said inflation
would stay low for some time and policymakers would pay close
attention to the euro's exchange rate in this context
when taking policy decisions.
But he warned against taking too one-dimensional a view of
the euro's strength, stressing the importance of the stimulative
effect of lower sovereign bond yields in the euro zone.
Investors' renewed appetite for euro zone sovereign bonds
could contribute to an appreciation of the euro but the lower
yields should have an expansionary effect on financing over the
medium term, Weidmann said in a speech in Frankfurt.
"It would therefore be too short-sighted only to take a
one-dimensional view of the exchange rate and to leave out the
stimulating effects of lower sovereign bond yields," he said.
Last week, Reuters reported that the ECB is preparing a
package of policy options for the June meeting, including cuts
in all its interest rates and targeted measures aimed at
boosting lending to small- and mid-sized firms.
The ECB has faced pressure from the French government to
change monetary policy course to weaken the euro, whose strength
poses risks to euro zone exports.
Weidmann, referring to demands for the ECB to tackle the
euro's exchange rate, said: "In order to strengthen growth and
employment in the euro zone over time, member states must
deliver competitive economic structures."
(Writing by Paul Carrel and Eva Taylor; Editing by John
Stonestreet and Susan Fenton)