FRANKFURT Euro zone inflation is likely to be sharply higher in 2017 than projected but will still dip towards the end of the year, Bundesbank president Jens Weidmann said on Wednesday, arguing that accommodative monetary policy remains appropriate.
With inflation surging on higher oil prices, and criticism of the European Central Bank (ECB) mounting in Germany ahead of September's elections, pressure has increased on the ECB to at least start a discussion about when and how it would scale back its extraordinary stimulus measures.
But the ECB has so far pushed back, arguing that growth is fragile, upcoming elections cloud the outlook, and the rise in inflation is temporary, still requiring years to rise sustainably towards its target of just under 2 percent.
"Assuming that oil prices do not rise any further ... inflation this year is likely to be well in excess of the figure projected to date; for Germany, an upward revision of around one-half percentage point is expected, and this might also be the case for the euro area as a whole," he said in Ljubljana.
Preliminary data from several German states showed inflation in the euro zone's economy probably surpassed the ECB's target of a rate just under 2 percent for the first time in more than four years in February.
The ECB sees inflation in the euro zone at 1.3 percent this year, a projection bound to rise when the bank publishes new forecasts next Thursday as oil prices LCOc1 are 17 percent above the assumptions that went into that number.
Weidmann, an ECB critic who has voted against many of the bank's easing measures, also acknowledged that underlying inflation is still weak, so the question is not whether loose monetary policy is needed but when the outlook would firm enough to justify a change in communication and eventually the policy stance.
Euro zone inflation is expected to have hit 2 percent last month and may still rise further in the first half before easing back toward the end of the year.
Weidmann stopped short of calling for any particular measures but argued that keeping borrowing costs low for too long risked getting budgets addicted to cheap cash, making eventual tightening even harder.
"Monetary policy has to avoid the markets' perception that the central bank is only willing to counter downward pressure on financial markets with an accommodative policy stance but refrains from tightening the reins in times of higher price stability risks due to the fear of triggering market turbulences," he said.
(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Louise Ireland)