ECB's Coeure Sees Euro Zone Inflation Straying Off Course

The European Central Bank will monitor euro zone inflation carefully over the next 18 months as it threatens to sink further below the ECB's 2 percent target, Executive Board member Benoit Coeure said on Friday.

Euro zone inflation slipped in March for a third straight month to an annual rate of 1.7 percent, compared to the ECB's goal of close to, but not above, 2 percent.

"We have a rate of inflation which looks set to move away from the ECB's 2 percent target over the next 18 months," Coeure told reporters at a breakfast event, adding that a drop in inflation was as worrying as a rise.

"It is still fairly close to the 2 percent target but it is moving below that goal and this is something the board of governors is clearly following as we have a goal of 2 percent," Coeure said.

Recent economic data is in line with the ECB's projections for the bloc this year and next, with "no bad surprises," Coeure added, saying this justified the bank's decision this week not to lower rates, despite worries about weak domestic demand.

The ECB held rates at a record low 0.75 percent on Thursday, the highest level among the world's major central banks, but ECB chief Mario Draghi said the central bank stood ready to act to boost the stalled economy.

Underlining the difficulties getting credit flowing in the bloc, Coeure said many banks were discouraged from granting new loans as their balance sheets remained weighed down with assets acquired before the financial crisis which had since lost value.

Though the ECB has provided vast amounts of liquidity to banks, Coeure said the central bank did not have a role to play in mitigating the risks from banks' pre-crisis legacy assets.

"Monetary policy cannot be the main tool used to try and resolve difficulties with credit flows. Monetary policy can contribute but it cannot completely resolve these problems," Coeure said.

The ECB is worried its low rates are not reaching households and companies in the euro zone periphery, mainly because banks' funding costs in crisis-hit countries are higher than those in the core countries, pushing up loan costs.

This affects small and medium-sized businesses in particular as they have few alternatives to bank funding.

REUTERS