ECB's Weidmann warns of rising inflation risks

Reuters

FRANKFURT (Reuters) - The European Central Bank must guard against steep oil price gains filtering through to broader inflation, an ECB policymaker said on Monday, adding that rising long-term inflation expectations must be taken seriously.

Jens Weidmann, the new chief of Germany's Bundesbank, also reiterated his view that the ECB should not further loosen its collateral rules, suggesting he would oppose accepting Greek paper as collateral if Athens restructures its debt.

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The ECB targets inflation of below, but close to 2 percent, but euro zone inflation came in at 2.8 percent in April.

"By itself, a temporary rise in inflation to over 2 percent due to higher raw material prices is not a reason for monetary policy reaction," Weidmann told a conference.

"But we must monitor closely if second-round effects will possibly materialize. We must also keep in mind the increasing upside risks to inflation due to the improving business cycle."

Weidmann also said the ECB could not neglect the rise in long-term inflation expectations.

"We have to take seriously the April rise in long-term inflation expectations and take it as a sign of increasing price perspectives when monetary policy is expansive."

Long-term inflation expectations rose in the ECB's survey of professional forecasters out last month to 2.0 percent from 1.9 percent three months earlier.

Weidmann also warned against blurring the lines between fiscal and monetary policy. "This can present a danger to monetary stability," he said.

Turning to the rules the 17-country bloc's central bank uses to accept collateral in its liquidity operations, Weidmann said they should not be made any looser.

"The collateral framework in the Eurosystem should not be worsened by still accepting sovereign bonds after reprofiling."

Weidmann's fellow ECB Governing Council member, France's Christian Noyer, said on Monday that restructuring Greece's sovereign debt would hurt the private sector as the bulk of the debt is held by its banks and insurance firms, causing a vicious cycle of debt restructuring and deterioration in the country's financial sector.

Greece and ECB officials have ruled out any kind of restructuring, but the chairman of the Eurogroup Jean-Claude Juncker said last week Greece may have to move toward a "soft restructuring" of its debt.

(Reporting by Eva Kuehnen, writing by Sakari Suoninen; Editing by John Stonestreet and Hugh Lawson)