"The Chinese central bank increased various times the rate of interest in the last months. But inflationary pressures remain and this mean they probably have to continue on this road," Bini Smaghi said in the paper.

The lack of flexibility in China's exchange rate is a factor in boosting its inflation, he said.

"The problem today in any case is the insufficient flexibility of some currencies, such as China's. That starts to create problems for China itself such as the increase in inflation," he said.

In the United States, the Fed is looking at core inflation, excluding the impact of energy and food raw materials.

"That is correct only if the increases in prices of raw materials are temporary," he said, adding there is little that can be done to counter imported inflation.

"The important point is that if interest rates are too low this favours the transmission of imported inflation to internal inflation. This has to be avoided absolutely," he said.

Current historically low interest rates are justified by fears of deflation, he said.

Rigorous monetary policy can anchor inflationary expectations, in turn lowering long-term interest rates which are important for public debt, he said.

On Moody's downgrade of Spain's sovereign debt, Bini Smaghi said ratings agencies are trying to recuperate credibility lost during the crisis by adopting an extreme policy reflecting more market worries than fundamentals.

"The only way that governments have to deny them is to act in advance with measures to improve their public finances, and by national supervisory authorities being transparent and by inducing banks to recapitalise without waiting for the reaction of markets," he said.

On Friday, Bini Smaghi said Europe should have a greater say in the way national supervisors operate, including on stress tests for their banks.

reutr March 12, 2011