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* Remarks run counter to earlier ones about supporting growth
* Says lower inflation due mostly to falls in energy, food prices
* Bundesbank expects recovery to push inflation back up
By Patrick Graham
BERLIN, March 29 (Reuters) - The euro zone is not in a deflationary cycle and the European Central Bank (ECB) should not overreact to a slowdown in inflation caused largely by cyclical factors which should prove temporary, Bundesbank President Jens Weidmann said on Saturday.
The comments from the head of Germany’s central bank, also a member of the ECB’s governing council, follow remarks last week which investors interpreted as a softening of long-held German resistance to more radical action to support growth.
The ECB is running official interest rates at a record low but unlike other major central banks has resisted calls to follow that move with outright “quantitative easing” to pump more money into the economy.
Weidmann said that about two thirds of the falloff in euro zone inflation to 0.7 percent, the lowest since the economy was deep in recession in 2009, could be attributed to falls in energy and food prices.
“Monetary policy should respond to such factors only in the event of second round effects,” he told a conference in Berlin, saying he would not talk about current monetary policy ahead of the ECB’s monthly policy meeting next Thursday.
“With regard to the rate of inflation at the moment, the euro area is not in a self-enforcing downward spiral of price decreases, which is nominally the definition of deflation,” he said.
He said consumers were not delaying purchases in anticipation of falling prices and the bank expected a recovery to gradually push inflation rates back up.
“This is not to say that a protracted period of lacklustre growth will not be an issue for policymakers,” he said, noting that he backed further structural reforms within euro zone states and an unplugging of banks’ credit provisioning to the real economy.
But Weidmann warned about the risk of running very low rates for an extended period.
“It is obvious to me that extremely low rates are a risk to financial stability,” he said, saying companies may then get used to lower rates.
“Eventually this might mean that a necessary structural change fails to take place,” he said, noting that this could sow the seeds of the next financial crisis.
“Risks to financial stability may ultimately culminate in risks to price stability,” he said.
With investors firmly focused on whether the euro zone’s central bank will act to bolster a slow economic recovery, Weidmann surprised financial markets last week by saying that negative interest rates were an option to temper euro strength.
He also said then that buying loans and other assets from banks to support the bloc was not out of the question. However, he also said there was no need to act for now.
The Bundesbank has been a stern opponent of the ECB’s government bond purchase programmes, drawn up during the debt crisis, saying they pushed it too far into the realm of financing governments. That, argued the Bundesbank, was not the ECB’s job. (Additional reporting by Reinhard Becker; Writing by Madeline Chambers; Editing by Tom Heneghan)