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ECB's Mersch: next meeting could yield combination of policies, implementation may vary

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[May 28, 2014]  By Stanley White

TOKYO (Reuters) - A European Central Bank meeting next week could yield a combination of policies to tackle low inflation and low credit growth, but the timing of the implementation could vary, ECB Executive Board member Yves Mersch said on Wednesday.

When asked about the chance of a cut in the ECB's three main interest rates, Mersch said he assumes the differential between the rates, which is called the corridor, will be maintained because narrowing the corridor could harm interbank markets.

Mersch also said that he did not see deflation on the horizon for the euro-zone but the central bank was preparing for this contingency just in case.

Other ECB officials have made similar reassurances on deflation, but there are worries that downward pressure on prices has become entrenched after the financial turmoil and spiralling jobless rates caused by Europe's debt crisis.

"Expectations have been raised because we have made it public that we are comfortable acting with both conventional and unconventional measures," Mersch told reporters on the sidelines of a conference at the Bank of Japan.

"What we've been doing is broadening our tool box and we will present some of these findings to the Governing Council."

ECB 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. He said he expected inflation, now running at 0.7 percent, to slowly return to the ECB's target of just under 2 percent.

Reuters reported earlier this month that the ECB is preparing a package of policy options for its June meeting, which includes cuts in the deposit rate, the main refinancing rate and the marginal lending rate.

The main refinancing rate is currently 0.25 percent and the marginal lending rate, or emergency borrowing rate, is 0.75 percent.

The deposit rate currently stands at zero, so taking it into negative territory would mean charging banks for parking their money at the ECB overnight.

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ECB officials have said that a negative deposit rate is an option, and Mersch's comments suggest that if the ECB takes this route, it will cut all three rates by the same margin to maintain the corridor and avoid damaging money markets.

Other tools on the shelf include an injection of cheap long-term funds with pricing linked to an increase in net lending and preparing targeted measures aimed at boosting lending to smaller firms.

The ECB is crafting policy options to prevent volatility in the short-term money market from harming longer-term funding and ensure proper functioning of the credit channel in the euro-zone, Mersch said.

The euro exchange rate is playing a more important role for prices as inflation is very low, but the ECB is not targeting the exchange rate to boost competitiveness, Mersch said.

(Editing by Kim Coghill)

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