ECB officials say bond-buying helping to revive inflation

By Marc Jones and John O'Donnell

LONDON/VIENNA (Reuters) - The European Central Bank's bond-buying programme is helping to revive inflation in the euro zone without drying up liquidity in the debt market, top ECB officials said on Friday.

The euro zone ended a four-month run of deflation in April as consumer prices held steady compared with a year earlier.

A rebound in the oil price this year has helped end deflation.

ECB Vice President Vitor Constancio said the central bank's quantitative easing policy of buying about 60 billion euros (£43.7 billion) of mainly government bonds each month was another factor.

"Our policy is working (according) to plan," Constancio said at an event in London. "Monetary financial conditions are supporting the recovery and lifting inflation expectations."

Low interest rates will also help boost economic growth by increasing demand, he said.

"I expect the current monetary stance to strengthen aggregate demand in the euro area.”

Constancio said monetary policy would need to remain accommodative for the foreseeable future to help bring inflation back up to the ECB's target of below but close to 2 percent.

He played down a recent sell-off in euro zone bonds, which he said appeared to be just a market correction.

"I don’t expect excessive volatility in the bond market to continue," he told reporters, adding: "We don’t have problems with the recent developments."

Speaking to Reuters in Vienna, ECB policymaker and Austrian central bank chief, Ewald Nowotny, said the number of government bonds with negative yields was declining.

"Developments in the past week have been helping with the (bond-buying) programme,” Nowotny said.

"The number of bonds with interest rates in negative territory has decreased, which helps for the execution of the programme."

Some economists have voiced concerns that the ECB's bond-buying programme risks crowding out other investors, while fiscal rigour in countries such as Germany means the ECB will be buying debt far faster than the government issues it on a net basis.

But ECB President Mario Draghi dismissed these concerns in a letter to Spanish member of the European Parliament, Ramon Tremosa i Balcells, dated May 7 and released on Friday.

"The implementation of the expanded asset-purchase programme is proceeding smoothly," he wrote.

"Concerns about the scarcity of bonds are therefore not warranted," he said, adding: "The programme is sufficiently flexible to be adjusted should circumstances change."

(Reporting by Marc Jones and Francesco Canepa in London, Michael Shields, John O'Donnell and Angelika Gruber in Vienna and Hugh Lawson in Frankfurt; Editing by Susan Fenton)