European Central Bank Governing Council member Axel Weber has said that inflation is likely to pose a risk next year and the ECB needed to ask itself whether stimulative policy was still needed.
"(Economic) growth has an increasingly strong foundation," Mr Weber, who is also Bundesbank chief, told the Berlin daily Der Tagesspiegel. "Therefore we must ask ourselves whether the current stimulation of growth through monetary policy is still needed in 2007."
Mr Weber said he saw a high risk that inflation would rise clearly above the ECB's 2 per cent ceiling next year. The recent retreat in inflation was transitory, he said, adding that there can be no talk of lasting relief.
The possibility that energy prices can climb again and continued strong credit growth to business are among "several risks that the inflation rate will certainly lie above 2 percent again", he said.
Inflation in the euro zone receded to an annual 1.7 per cent in September but ECB staff see the rate at 2.4 per cent for the whole year and in 2007.
Accordingly, the ECB has signalled it plans to raise its benchmark interest rate again by the year end to 3.5 per cent. After that, rate policy is unclear.
But Mr Weber's remarks indicated that he saw little room for complacency on monetary tightening, though he does expect growth in Germany to weaken somewhat next year.
The retreat in oil prices provides relief to consumers, Mr Weber said. Should this continue, it would allow consumers to absorb better the three percentage point increase in value-added tax to 19 per cent in Germany next year.
"Strong competition however will inhibit it (the VAT increase) from being fully passed on. At the most, two thirds is realistic," he said.
In any case, Mr Weber expects price increases and a dampening of economic activity. Even though he expects the VAT increase to soften growth next year, the long-term outlook remains intact, he said.