By Farah Master
HONG KONG (Reuters) - European Central Bank board member Lorenzo Bini Smaghi said on Monday the euro zone is enjoying better-than-expected economic growth, but warned inflation is becoming a concern and higher food and energy prices may be permanent.
"Things are better than expected in terms of growth (and) unemployment," Bini Smaghi told a business lunch in Hong Kong.
In a speech that focused on the financial turmoil in Europe and prospects for the euro currency, he said there were concerns in the financial markets about euro zone's higher-than-expected inflation and warned that higher energy and food prices may be something economies have to get used to.
"Inflation is higher than expected because of global events. We all have to understand to what extent this higher inflation is due to temporary or a longer underlying phenomenon," he said.
"There is pressure on prices of agricultural products and this may not be a temporary phenomenon, it may be a permanent one, the same for energy."
Bini Smaghi has delivered a string of speeches in recent weeks warning that the rise of oil, commodity and food prices is likely to be more than just a temporary spike.
The ECB was keeping a close eye on price trends, he said.
"In our case, we (the ECB) have a clear objective which is to look at inflation and to avoid inflation," he said, adding the bank would have to assess the impact of imported energy and food price inflation.
On Friday, Bini Smaghi said that the ECB could use its monetary policy in a pre-emptive fashion to head off inflation.
His latest comments helped the euro pare most of its early losses against the dollar in Asian trade on Monday, keeping alive the prospect that the ECB may raise interest rates before the U.S. Federal Reserve.
He would not comment on whether the ECB would upgrade inflation targets in a forecast to be released two weeks from now.
"We will update it and we will see what the result is," he said.
STRONG DATA
ECB policymakers have sounded increasingly aggressive on inflation since the beginning of the year. Euro zone inflation accelerated to 2.4 percent in January, the highest in more than two years and further above the ECB's target of below but close to 2 percent.
Athanasios Orphanides, another of ECB's top policymakers, said in an interview with the Wall Street Journal on Monday that it cannot be ruled out that euro zone inflation will stay above the ECB's target of just under 2 percent for longer than expected.
Austrian central bank governor, Ewald Nowotny, added his voice to the concerns, saying the ECB was watching developments very closely but that at present there appeared to be no sign of second round effects.
Fresh data on manufacturing and German sentiment bolstered the ECB's current belief that the euro zone recovery remains on track and is keeping upward pressure on inflation.
Activity in the euro zone's factories and private sector grew faster than expected this month and is pushing up prices, new data on Monday showed. Closely-watched German business sentiment also improved in February.
Bini Smaghi also said that reforms needed to be implemented in euro zone countries in which growth was slower, adding that Italy needed to adopt reforms to stimulate growth, and its budget needed further cuts to stabilize debt.
Commenting whether a single fiscal policy would be beneficial to the entire eurozone, he said he does not think such a policy is appropriate and that "decentralized policy is not necessarily bad."
He encouraged banks in eurozone not to be "too easy-going," and urged them not to rely on ECB credit, and to return to capital market as soon as possible.
(Reporting by Farah Master; Editing by Patrick Graham)