By Leika Kihara and Stanley White
TOKYO (Reuters) - European Central Bank Governing Council member Christian Noyer said on Monday that interest rates have to remain low for an extended period and might go even lower if needed as officials try to ensure the euro zone does not fall into deflation.
Central bankers have to invent policies to achieve price stability if conventional monetary policy stops working, Noyer said, suggesting the ECB will keep its options open after a surprise slowdown in inflation.
"We see risks that low inflation will remain for some time," Noyer said at a conference in Tokyo.
"We will keep interest rates low for an extended period, or even lower if need be, for price stability."
ECB executive board member Benoit Coeure said disinflation in Europe is likely to continue for now, but will not progress to deflation because the economy is recovering and inflation expectations remain anchored around 2 percent.
A slowdown in inflation in the euro zone prompted the ECB to cut its main refinancing rate to a record low of 0.25 percent earlier this month. A more conservative minority at the bank voted against this move, raising concerns about a split within the bank.
With the nominal benchmark interest rate approaching zero, there are also concerns about whether the ECB has enough ammunition to combat slowing prices.
The ECB's mandate is to keep inflation close to but below 2 percent. The central bank eased policy to prevent the slowdown in inflation from lowering inflation expectations, Noyer said.
Recent wage cuts in some European countries are a welcome adjustment for competitiveness, because this helps reverse a trend where wages rose too rapidly, he said.
At the same time, the ECB does not want inflation to become too low, because this could jeopardize price stability, Noyer said.
Coeure said that Europe's economy is stabilizing and the banking sector is strengthening, but policymakers need to make progress with structural reforms to bring down unemployment and encourage business investment.
With euro zone inflation running at 0.7 percent, well below the ECB's target, several central bankers have said recently they are open to taking new steps to prevent deflationary pressure from harming the economic outlook.
SEEKING A 'SAFETY MARGIN'
In cutting the refinancing rate, "we did not act because we see deflation risks materializing in the euro area," Coeure said. "Rather, we acted because we wanted to keep a sufficient safety margin above zero percent inflation."
Because the euro zone economy is growing again, inflation will very gradually return to a level that is close to but below 2 percent, Coeure said, but added monetary policy alone cannot ensure a sustained economic recovery.
Deep structural reforms are also needed to raise the potential growth rate and avoid a vicious circle where low growth expectations cause companies to delay investment, which would further lower potential growth, he said.
Last week, ECB President Mario Draghi poured cold water on a media report that the ECB was actively considering taking its deposit rate - now at zero - into negative territory.
This move would see the ECB effectively charging banks a fee to hold their money overnight, and could possibly encourage banks to lend more, which could ease deflationary pressure.
The euro fell against the dollar and the yen last week after the media report was published.
(Editing by Eric Meijer and Richard Borsuk)