Too much liquidity?

FRANKFURT (Reuters) – Loose monetary policy has increased liquidity globally and in the eurozone 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,» Issing told the German business daily Handelsblatt, according to an advance copy of an interview 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 signaled its intention to raise its key rate, now at 2.5 percent, for a third time at its next meeting in June. Asked whether he was satisfied with price stability in the eurozone, Issing, who is stepping down on May 31 and will not attend the ECB’s next monetary policy meeting on June 8, said the bank had only «narrowly missed» its target of keeping inflation at just below 2 percent. 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 eurozone countries. «Earlier, inflation has shot up worldwide with such oil price rises,» Issing said. Inflation in the eurozone was 2.4 percent year-on-year in April. Data for May are due for release on May 31. A Reuters poll of 43 economists foresees an unchanged rate of 2.4 percent.