By Michelle Martin
BERLIN (Reuters) - The Bundesbank is ready to back ECB policy action if needed but not every measure under discussion is suitable and large-scale asset purchases may well not be, the president of the German central bank said on Wednesday.
European Central Bank President Mario Draghi said last week the Governing Council was "comfortable with acting next time" - at its June 5 policy meeting - but wanted to see updated economic projections from the bank's staff first.
Euro zone inflation has been in what Draghi has called "the danger zone" below 1 percent for seven months. It inched up to 0.7 percent in April but is still far from the ECB's target of below but close to 2 percent.
Jens Weidmann, president of Germany's powerful Bundesbank said the ECB could not decide to act on the basis of the inflation forecast alone. It also needed to analyse whether the medium-term outlook for inflation had deteriorated and if so, whether the factors driving inflation lower would persist.
"If it is necessary, then the Bundesbank is prepared to take action," Weidmann said in a moderated interview at an event hosted by German newspaper Die Welt, adding this did not mean automatically that every measure discussed was suitable.
Five sources told Reuters the ECB is preparing a package of policy options for its June meeting, including cuts in all three interest rates and targeted measures aimed at boosting lending to small and medium-sized companies. Executive Board member Yves Mersch also said the ECB was readying several measures that could be used if it decides to take fresh policy action in June.
The package would offer some stimulus for the euro zone economy but would fall short of the large-scale effect the ECB could unleash with a major programme of quantitative easing, or QE - printing money to buy assets.
Such a plan still seems a long way off, something Weidmann, seen as one of the most hawkish ECB policymakers, reinforced by saying: "Perhaps a QE programme is not suitable to deal with the problem of current inflation rates."
Asked whether the Bundesbank had committed to QE, Weidmann said it had not said 'yes' to anything yet.
GROWING PRESSURE
There have been repeated calls from the International Monetary Fund and other institutions as well as governments for the ECB to add more monetary stimulus and curb a rise in the euro's exchange rate.
IMF chief economist Olivier Blanchard said on Wednesday the Fund saw a 25 percent chance of the euro zone slipping into deflation by the end of next year.
Jean-Claude Juncker, the centre-right candidate to head the European Union's executive Commission, said he would not hesitate to propose foreign exchange policy guidelines binding on the ECB if the euro were to become too strong.
The euro traded at just over $1.37 on Wednesday after coming close to $1.40 last week, described privately by some EU officials as the "pain threshold" for the euro zone economy.
Weidmann said introducing an exchange rate target would not be compatible with an independent monetary policy. He also said those who were warning about the dangers of deflation had a different view of the economy than the ECB.
"We have a relatively low - a very low - risk of deflation, and in the process of the economic recovery we are seeing, over the forecast period, inflation rates will tend to go back up and those dangers of deflation will get even smaller than they already are.
"So it's a problem that's getting smaller," Weidmann said.
(Reporting by Michelle Martin; Writing by Eva Taylor; Editing by Catherine Evans)