(Adds comments from Draghi, Brazil, Japan; currency background)
* Clearest signal yet that exchange rate could bring QE
* ECB should mull action if inflation stays low - IMF
* Japan, Brazil among nations leaning on Europeans
By Jan Strupczewski and Krista Hughes
WASHINGTON, April 12 The European Central Bank
will ease monetary policy further if the euro keeps
strengthening, President Mario Draghi said on Saturday as world
finance chiefs ramped up pressure on Europe to ward off
In the clearest signal yet the ECB was prepared to launch a
stimulative asset-purchase program, Draghi said the euro's
exchange rate had become increasingly important to policy and
would act as a trigger.
"The strengthening of the exchange rate would require
further monetary policy accommodation. If you want policy to
remain as accommodative as now, a further strengthening of the
exchange rate would require further stimulus," he told a news
The issue of weak euro zone inflation took center stage at
meetings of top finance ministers and central bankers on
Saturday, with the International Monetary Fund's steering
committee urging the ECB to consider acting if low inflation
"The Fund is recommending more monetary easing to the ECB,
and rightly so," said Guido Mantega, Brazil's finance minister.
The world's financial markets are watching closely. Last
week, the ECB kept interest rates steady but opened the door to
turning on its money-printing presses to boost the weak euro
zone economy and inflation. At that time, Draghi said the ECB
had achieved unanimity that asset purchases, or so-called
quantitative easing, might be needed.
Over the past 12 months, the euro has strengthened by nearly
5.5 percent against the dollar and by nearly 10 percent
against the yen. In recent weeks, it has reached
levels against the dollar not seen since late 2011. It ended
last week at just below $1.39.
Draghi said on Saturday that euro appreciation over the last
year was an important factor in bringing inflation in the
currency bloc down to its current low levels, accounting for as
much as a half percentage point of the decline in the annual
rate, which stood at only 0.5 percent year-on-year in March. The
ECB aims to keep inflation close to but under 2 percent.
"I have always said that the exchange rate is not a policy
target, but it is important for price stability and growth,"
Draghi said. "What has happened over the last few months is that
it has become more and more important for price stability."
The euro's recent strength has baffled many players in the
global currency market given Europe's low interest rates, tepid
growth prospects and near-zero inflation. In fact, most currency
analysts expected an improving outlook for the U.S. economy and
the winding down of the U.S. Federal Reserve's massive stimulus
program to drive the dollar up against the euro this year.
Some of the investment flows supporting the euro are
reflected in the strong performance of sovereign debt from
several of southern Europe's bailed-out nations, which until
recently had featured substantially higher yields. On Thursday,
for instance, an auction for 3 billion euros of five-year bonds
sold by Greece drew more than 20 billion euros in orders.
AN ORIENTATION, NOT A LEVEL
Quantitative easing was something previously considered
highly undesirable by some euro zone central bankers, and only
to be considered if prices were falling outright.
But policymakers in recent weeks publicly broached cutting
deposit rates below zero - effectively charging banks that hold
excess cash at the ECB - or embarking on bond purchases as have
the United States, Japan and Britain, if the threat of deflation
became more acute.
Draghi said two things would drive any decision: "One is an
unwanted tightening of monetary financial conditions, and the
second is deterioration of our medium term outlook."
"I don't want to give you a level where we will act or not.
I am giving you an orientation," he said of euro strength.
In July 2008, the currency's rise to an all-time high of
$1.60 did not trigger an ECB response, even though euro zone
finance ministers tried to talk down the currency. But inflation
was near an all-time high at 4 percent, serving the ECB's need
to keep price growth in check.
JAPAN'S PAINFUL EXAMPLE
In a rare move for the usually soft-spoken Japanese, Finance
Minister Taro Aso - drawing on Japan's own experience of a
protracted period of deflation - directly warned the euro zone
about the dangers of falling prices.
"Based on our experience, once a deflationary mindset takes
hold, it is easy to fall into a vicious cycle, whereby people
start to postpone consumption and investment, leading to further
deflationary pressures," he told the IMF panel.
There are striking parallels between 1990s Japan and the
euro zone's plight now: weak bank lending, fragile economic
growth, a rising exchange rate, and the central bank's
insistence that deflation is not on the horizon.
While Japan has been mired in deflation for most of the last
15 years, the price declines in the early years were so mild
that the Bank of Japan was slow to acknowledge deflation had set
That is why Japanese policymakers warn against complacency
even if, as Draghi points out, long-term inflation expectations
in the euro area appear to remain "well-anchored."
(Reporting by the Reuters IMF/World Bank team; Writing by
Jonathan Spicer; Editing by Andrea Ricci and Dan Burns)