Inflation risks could move to upside -ECB's Weber

Inflation risks in the euro zone could well move to the upside and the 17-country region's economic outlook has clearly improved, European Central Bank Governing Council Axel Weber said on Friday.

Risks to the medium-term outlook for inflation which are so far still broadly balanced could well move to the upside, Weber said in the text of a speech, to be given at an event hosted by the Campus for Finance.

Thus, price developments have to be monitored very closely.

Weber's comments added to a warning by the European Central Bank (ECB) on Thursday that the euro zone faces short-term price pressures -- taken by some in financial markets as a sign it could raise rates earlier than previously thought.

Weber, regarded as one of the most hawkish and influential policymakers within the ECB, in his remarks added the words so far and well to the ECB's statement on Thursday after the bank kept interest rates on hold at a record low of 1 percent.

The key euro-priced bank-to-bank lending rate -- a gauge of interest rate expectations and banks' appetite for lending -- jumped back above 1 percent on Friday on the ECB's comments on inflation concerns although the euro pared gains from Thursday.

Analysts said the marginally stronger tone in Weber's words was less important than the fact that he stuck to the message.

The most remarkable thing .... was how closely he stuck to the language of the introductory statement, Societe Generale economist James Nixon said.

ECB RATES APPROPRIATE

Analysts have expected the first euro zone rate increase to come in the fourth quarter of this year.

Weber's fellow Governing Council member Erkki Liikanen said earlier that inflation in the euro zone was not yet a concern.

When we look at the price expectations ... there is not great worry yet, but we always have to be more watchful when this (inflation above ECB's target) happens, Liikanen said.

ECB Executive Board member Juergen Stark said late on Thursday the central bank would wait and see how prices develop.

We have communicated that we will monitor developments closely and the question is whether the upside risks that we spoke of today will materialise -- nobody can say today, Stark said at an event.

We must wait and see.

Weber, who heads Germany's Bundesbank and is one of the ECB's most influential policymakers, also struck a positive note on the euro zone economy. He said that while growth risks were still slightly pointing down, the recovery should continue and expectations were improving.The economic outlook has brightened considerably. This is not just true for Germany but also for the euro area in general, he said.

Weber's message on inflation and growth bolstered the view that the central bank is determined to fend off inflation.

Weber also said the ECB's current rates remained appropriate and warned against assuming that the financial crisis was over.

He also said the sovereign debt crisis engulfing Greece and Ireland had so far not significantly affected euro zone economic developments, but was serious.

The sovereign debt crisis still poses a serious challenge for the euro area as a whole that needs to be resolved before it potentially becomes a more serious threat to the recovery.

The Bundesbank head, who is seen by analysts as the front-runner to become the next ECB president, said that tougher Basel III banking regulations should not cut economic growth.