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Coeure sees no reason for 'spectacular' ECB action

Benoit Coeure, executive board member of the European Central Bank (ECB) gestures during an interview with Reuters in Frankfurt February 26, 2013. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) - Euro zone inflation is not undershooting the European Central Bank's target of just below 2 percent so much that it should use its heaviest artillery to try to boost prices, ECB Executive Board member Benoit Coeure said.

Coeure told a journalist club on Monday night that the ECB was ready to act, but that the euro zone was not edging towards a dangerous fall in prices. His comments were embargoed until Tuesday.

The ECB cut its interest rates to a record low of 0.25 percent last month after October inflation fell to an alarmingly low 0.7 percent, increasing fears the currency bloc would see a spiral of persistently falling prices.

"Inflation prospects are consistent with our objective, so I don't see need to use spectacular measures, such as U.S.-style large-scale asset purchases," Coeure said, adding that the ECB can buy government bonds as long as it does not do so for the purpose of financing governments.

But the Frenchman added that the ECB would keep a close eye on price developments and would be ready to act, if needed. At the same time, there was no evidence of deflation taking root.

"We have not even taken the first step towards deflation, that would be the de-anchoring of inflation expectations."

Commenting further on the inflation outlook he said that inflation would accelerate gradually to the ECB's target.

"Staff forecasts say the inflation will gradually recover and will come back towards 2 percent in 2015 and presumably back to 2 percent at some later point, but not so long after the expiration of the forecasts."

Earlier this month, the ECB released new staff economic projections that forecast inflation of 1.3 percent for 2015.

Fellow ECB Executive Board member Yves Mersch said on Monday that buying government bonds would pose immense challenges for the central bank and warned against knee-jerk reactions when inflation falls below 2 percent.

Turning to the ECB's forward guidance, Coeure said this was based solely on the inflation outlook and the ECB would not refrain from hiking rates if inflation was seen rising above target. The euro zone central bank broke in July with its tradition of never pre committing, stating that it expected to keep interest rates low for an extended period of time.

"We are not on that line, not at all, we will not change our reaction function," Coeure said.

Coeure, the member of the ECB's six-man Executive Board in charge of money-market operations, said that were the ECB to conduct extra liquidity operations, it would ensure the funds would not be used to buy only government bonds.

"We want to be sure that if we provide additional lending to banks, this would serve a purpose," Coeure said. "It has to be the case that the money will go into the real economy."

But he added that it could be difficult for the ECB to set rules for providing money conditionally.

"If we go too far into credit allocation there is a risk that we are doing things that others do better than we do, maybe we should not even do," Coeure said.

The ECB would not cut any corners when it takes on new duties of banking supervision next year, Coeure said.

"We will be safer and it will be more comfortable for us to implement monetary policy when we have a single banking supervisor, which will be a tough banking supervisor," he said.

(Reporting by Sakari Suoninen and Andreas Framke; Editing by Catherine Evans)