* Weidmann says not every measure under discussion suitable
* QE perhaps not suitable to deal with low inflation
* Euro FX target not compatible with independent monetary
* Says sees "very low risk" of deflation in euro zone
(Adds further comments, detail)
By Michelle Martin
BERLIN, May 14 The Bundesbank is ready to back
ECB policy action if needed but not every measure under
discussion is suitable and large-scale asset purchases may well
not be, the president of the German central bank said on
European Central Bank President Mario Draghi said last week
the Governing Council was "comfortable with acting next time" -
at its June 5 policy meeting - but wanted to see updated
economic projections from the bank's staff first.
Euro zone inflation has been in what Draghi has called "the
danger zone" below 1 percent for seven months. It inched up to
0.7 percent in April but is still far from the ECB's target of
below but close to 2 percent.
Jens Weidmann, president of Germany's powerful Bundesbank
said the ECB could not decide to act on the basis of the
inflation forecast alone. It also needed to analyse whether the
medium-term outlook for inflation had deteriorated and if so,
whether the factors driving inflation lower would persist.
"If it is necessary, then the Bundesbank is prepared to take
action," Weidmann said in a moderated interview at an event
hosted by German newspaper Die Welt, adding this did not mean
automatically that every measure discussed was suitable.
Five sources told Reuters the ECB is preparing a package of
policy options for its June meeting, including cuts in all three
interest rates and targeted measures aimed at boosting lending
to small and medium-sized companies. Executive Board member Yves
Mersch also said the ECB was readying several measures that
could be used if it decides to take fresh policy action in June.
The package would offer some stimulus for the euro zone
economy but would fall short of the large-scale effect the ECB
could unleash with a major programme of quantitative easing, or
QE - printing money to buy assets.
Such a plan still seems a long way off, something Weidmann,
seen as one of the most hawkish ECB policymakers, reinforced by
saying: "Perhaps a QE programme is not suitable to deal with the
problem of current inflation rates."
Asked whether the Bundesbank had committed to QE, Weidmann
said it had not said 'yes' to anything yet.
There have been repeated calls from the International
Monetary Fund and other institutions as well as governments for
the ECB to add more monetary stimulus and curb a rise in the
euro's exchange rate.
IMF chief economist Olivier Blanchard said on Wednesday the
Fund saw a 25 percent chance of the euro zone slipping into
deflation by the end of next year.
Jean-Claude Juncker, the centre-right candidate to head the
European Union's executive Commission, said he would not
hesitate to propose foreign exchange policy guidelines binding
on the ECB if the euro were to become too strong.
The euro traded at just over $1.37 on Wednesday after
coming close to $1.40 last week, described privately by some EU
officials as the "pain threshold" for the euro zone economy.
Weidmann said introducing an exchange rate target would not
be compatible with an independent monetary policy. He also said
those who were warning about the dangers of deflation had a
different view of the economy than the ECB.
"We have a relatively low - a very low - risk of deflation,
and in the process of the economic recovery we are seeing, over
the forecast period, inflation rates will tend to go back up and
those dangers of deflation will get even smaller than they
"So it's a problem that's getting smaller," Weidmann said.
(Reporting by Michelle Martin; Writing by Eva Taylor; Editing
by Catherine Evans)