Fears about resurgence of euro zone inflation exaggerated: Villeroy

[January 26, 2017]  MUNICH, Germany (Reuters) - Fears of a resurgence of euro zone inflation are exaggerated and an exit from stimulus has not been discussed, a top European Central Bank policymaker said on Thursday, countering the bank's top hawk and exposing a rift among rate setters.

French central bank chief Francois Villeroy de Galhau, responding to German criticism of the ECB, said German inflation will likely ease back from a spike at the start of this year and policymakers need to look through temporary swings caused by oil prices.

He spoke just days after Executive Board member Sabine Lautenschlaeger argued that preconditions for a stable rise in inflation are in place, so the ECB could soon start to plan an exit from its unprecedented stimulus program.

Having fought the risk of deflation for years, the ECB is now under pressure as higher energy costs feed into other prices, igniting calls for the bank to ease off the accelerator - particularly in Germany, where inflation is already close to the ECB's 2 percent target.

"Some seem to fear a resurgence of inflation; this is very exaggerated," Villeroy said. "Although quantitative easing will obviously not last forever, we clearly did not discuss tapering or any exit strategy.

"It is not our aim to keep interest rates low for too long," he said. "They are merely the necessary condition today for gradually returning toward our inflation target, and ensuring lastingly higher interest rates in the future."

Governor of the Bank of France Francois Villeroy de Galhau attends a press conference after the Franco-German Financial Council meeting in Berlin, Germany, September 23, 2016. REUTERS/Axel Schmidt

Market-based interest rates have already started to turn higher, Villeroy said, pointing to a 60 basis point gain in 10-year German yields since September, a sign that markets are starting to prepare for eventual rate hikes.

Any discussion of winding down the ECB's 2.3 trillion euro asset-buying program has been taboo as inflation remains low, having forced the bank to expand or extend the scheme several times already.

Villeroy added that while Germany may face relatively high inflation, this was a valid reflection of its economic performance and the ECB was focused on the euro zone as a whole.

"The inflation differences between countries are consistent with their different national economic situations: growth and employment are also stronger in Germany," he said.

(Reporting by Joern Poltz; writing by Balazs Koranyi; editing by Mark Heinrich)

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