* Bundesbank prepares for inflation above euro zone average
* Bundesbank position highlights diverging price pressures
* ECB says ready to act to contain upside price risks
* Survey sees firm near-term prices, pressure easing in 2013
By Andreas Framke and Sakari Suoninen
FRANKFURT/VIENNA, May 10 (Reuters) - The European Central Bank is ready to raise interest rates when inflation risks arise, a top ECB policymaker said on Thursday as a survey pointed to stubbornly high prices this year and the Bundesbank signalled it may live with higher German inflation.
Financial markets are looking to the ECB to take further steps to stem the euro zone crisis but ECB policymakers speaking at a conference in Vienna focussed more on being ready to unwind the extraordinary support they have taken than any fresh action.
Peter Praet, the ECB Executive Board member who holds the powerful economics portfolio, said the bank will raise interest rates when it sees upside risks to prices, and remove other crisis measures if they add to inflation pressures.
“As in the past, the Governing Council will be vigilant in order to contain upside risks to price stability”, Praet said in a speech at an Austrian National Bank conference.
Euro zone rates are at a record-low level of 1.0 percent and the ECB said earlier this month inflation risks are balanced.
In addition to cutting rates, the ECB has injected over 1 trillion euros into the financial system with twin 3-year funding operations, or LTROs, in December and February that eased markets’ angst in the first quarter about the euro zone.
Inconclusive elections in Greece and renewed concerns about the health of Spain’s banking sector are nonetheless feeding those fears again and the supportive effect of the LTROs is wearing thin.
But Praet gave no indication the ECB was ready to take further such ‘non-standard’ measures and stressed the temporary nature of those steps already taken.
“Extraordinary monetary policy interventions have to be temporary in nature and tied to a commitment of swift reversal as soon as conditions improve,” Praet said.
The ECB’s non-standard measures, including the LTROs, do not stand in the way of an interest rate increase, he added.
Another ECB policymaker, Austrian central bank chief Ewald Nowotny, took a slightly softer line but also gave no indication that the ECB could take fresh action.
“Whenever we take a new action at the ECB, we also have discussion on how to end it. If need comes, we do have an arsenal also to be on the restrictive side,” he said.
“We have a number of possibilities for the restrictive side, but it is quite important to note that now is not the time for that,” he added.
Nowotny said inflation expectations are well anchored but that there are increasing divergences in growth in Europe.
In the near-term, an ECB survey pointed to higher inflation than previously seen - though it showed cost pressures easing.
The central bank’s latest survey of professional forecasters, released on Thursday, projected average euro zone inflation of 2.3 percent this year compared to 1.9 percent seen in February.
The survey of 56 experts saw inflation easing to 1.8 percent next year. It February, the 2013 forecast was 1.7 percent.
In Germany, the Bundesbank signalled it was preparing to stomach higher German inflation rates that it expects as a result of the structural adjustments economies on the periphery of the euro zone are making.
Such reforms in peripheral states would improve their competitiveness and under this scenario Germany could have an inflation rate above the bloc’s average, the bank said in a statement for a parliamentary hearing on Wednesday.
“That means an inflation rate moderately above the ECB inflation target of around 2 percent,” a Bundesbank source who declined to be identified told Reuters.
Germans have a deep-seated aversion to inflation stemming from the national experience of hyperinflation in the 1920s and the Bundesbank has traditionally pushed for tighter ECB monetary policy to choke off price pressures.
Although the Bundesbank still wants stable prices across the euro zone, its latest comments show the bank recognises that upward pressure on German wage costs and property prices suggest its inflation is likely to rise above the bloc’s average.
“It means that they will not try to fight a purely German interest rate policy in the (ECB),” said Christian Schulz at Berenberg Bank, a former ECB economist.
“They are aware that interest rates have to be lower than they would be if Germany was on its own,” he added, referring to the ECB’s one-size-fits-all monetary policy.
German wage costs have lagged those in other euro zone countries for years. But the economic contraction in the bloc’s periphery means those countries face downward price pressures while Germany will live with more normal inflation rates.
Schulz saw inflation in Germany rising by “a tenth of a percent, or maybe two.”
“But in the rest of Europe, inflation is going to be much lower than it was in the past and that just means that Germany will end up slightly above the euro zone inflation average rather than below as in the past,” he added.
German annual inflation eased to 2.0 percent in April, in line with the ECB’s target of close to but below 2 percent. Euro zone inflation is running at 2.6 percent.