FRANKFURT Oil prices could stabilise at an elevated level and rising inflation will automatically make European Central Bank policy looser, much like in the case of a rate cut, Governing Council member Jens Weidmann said on Monday.
Weidmann, a long-time critic of the ECB's ultra easy policies, also said that the housing market may already be overheating in several euro zone countries, even as governments have failed to make the best use of ultra low borrowing costs, spending much of the windfall.
Oil prices LCOc1, on their best run in years, are up nearly 50 percent this year and a production cut agreed by major producers recently could keep the rally going, reviving inflation after it undershot the ECB's target of 2 percent for close to 4 years.
"Monetary policy becomes looser automatically over the coming months, even without central bank action: when inflation rises as forecast in our projections, the real interest rate declines," Weidmann, the head of Germany's Bundesbank said in Brussels. "The effects are similar to a central bank rate cut."
Rising oil prices could present the ECB with a new challenge: although higher energy costs will boost inflation, a relief for the bank that still feared deflation just a few months ago, they could also cut into the bloc's still fragile growth, thwarting the recovery.
The ECB earlier this month extended it asset buys until the end of 2017, promising an extended market presence to keep borrowing costs low as growth is still fragile and elections in the bloc's biggest economies keep uncertainty high.
"I fear that the danger of fiscal policy becoming too comfortable with the current low-interest-rate environment increases with the time these favourable financing conditions exist," Weidmann said.
"It is key that concerns over financial market volatility or the sustainability of public finances do not lead to a postponement of an exit from the ultra-loose monetary policy," he added.
Although super low rates have not yet created real estate bubbles across the euro area, some property markets are at risk of overheating, Weidmann said, noting that Finland, Ireland and the Netherlands have already taken measures to limit the risk of bubbles.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)