Loose monetary policy has increased liquidity globally and in the euro zone, and this entails potential for inflation, European Central Bank (ECB) chief economist Otmar Issing was quoted as saying yesterday.
"The very expansive monetary policy course has led to a strong increase in liquidity globally and in the euro area," Mr Issing told the German business daily Handelsblatt, according to an advance copy of an interview to be carried in today's edition.
"The high liquidity contains an inflationary potential," he said.
The ECB ended two years of record-low interest rates in December 2005 by starting to tighten monetary policy, but many analysts still regard the bank's policy as expansive. The ECB has signalled its intention to raise its key rate, now at 2.5 per cent, for a third time at its next meeting in June.
Asked whether he was satisfied with price stability in the euro zone, Mr Issing, who is stepping down on May 31st and will not attend the ECB's next monetary policy meeting on June 8th, said the bank had only "narrowly missed" its target of keeping inflation at just below 2 per cent.
This was remarkable, he said, pointing out that the price of oil had risen to $70 a barrel, from just over $10 in 1999 when the ECB took over monetary policy responsibility for the euro-zone countries.
"Earlier, inflation has shot up worldwide with such oil price rises," Mr Issing said.
Inflation in the euro zone was 2.4 per cent year-on-year in April. Data for May are due for release on May 31th. A Reuters poll of 43 economists foresees an unchanged rate of 2.4 per cent.
Asked about the main potential sources of error in central bankers' decision-making, Mr Issing said the danger was in monetary policy being focused too much on the short-term. He said some euro-zone member countries, which he did not name, had manoeuvred themselves into a difficult position by allowing unit labour costs to rise too much.
On average, unit labour costs in the euro zone rose 1.3 per cent year-on-year in the third quarter of 2005, the latest period for which data were available in the ECB's May monthly bulletin. - (Reuters)
