ECB's Draghi, Weidmann differ on inflation ahead of key decision

FRANKFURT (Reuters) - European Central Bank chief Mario Draghi said on Friday the rebound in euro zone inflation was weak, while his top critic, Bundesbank head Jens Weidmann, said price pressures would build eventually and ‘extra care’ was needed with even temporary unconventional measures.

Central Bank (Bundesbank) Chief Jens Weidmann attends a press conference after the Franco-German Financial Council meeting in Berlin, Germany, September 23, 2016. REUTERS/Axel Schmidt

The pair’s differing views reveals the rift over the main topic of debate on the ECB Governing Council as it prepares to decide next month on whether to extend the bank’s 1.74 trillion euro asset-buying scheme.

The scheme, which is due to expire in March, has helped fight off deflation, but with inflation now starting to recover, a fresh debate is starting on how and when to begin rolling back the stimulus.

“We do not yet see a consistent strengthening of underlying price dynamics,” Draghi told a conference, arguing that much of the recent inflation rise is caused by the statistical effect of past oil price declines falling out of statistics.

“Despite the recovery in growth and employment, the persisting output gap is still keeping inflation dynamics weak,” Draghi said, noting that the bloc’s recovery still relies to a considerable degree on accommodative monetary policy.

For stimulus to be rolled back, the inflation rebound needs to be durable and self-sustaining even with a lower level of accommodative policy, Draghi said, in remarks that seemed to support an extension of the stimulus program.

Markets now expect the ECB’s assets purchases to be extended by three to six months in December, although market volatility since the U.S. presidential election may complicate the decision.

Weidmann on the other hand, an opponent of many of the ECB’s stimulus measures, warned that unconventional monetary policy tools distort markets, raising the risk that even more intervention may be needed to curb such distortions.

“More monetary policy fine-tuning leads to ever more fine-tuning,” Weidmann said. “Unconventional instruments should be used with extra care – even if they are used only temporarily.”

“And we shouldn’t forget that our concept of price stability is a medium-term concept. So monetary policy doesn’t need to respond automatically whenever inflation deviates from levels consistent with the definition of price stability,” he said.

Past drivers of inflation remain in place so as the euro zone economy increases its output, inflation will once again rise, Weidmann added.

“A waning output gap drives inflation higher,” Weidmann said.

Reporting by Balazs Koranyi; Editing by Francesco Canepa; Editing by Hugh Lawson