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Former Bundesbank chief warns against rising inflation Former Bundesbank chief's inflation warning
(about 17 hours later)
By Lesley Curwen Business Daily, BBC World ServiceBy Lesley Curwen Business Daily, BBC World Service
As the European Central Bank (ECB) meets this week to decide its interest rate policy, a hawkish voice from the past has been raising concerns about rising inflation. As the European Central Bank (ECB) presents its latest decision on interest rate policy, a hawkish voice from the past has been raising concerns about inflation in the eurozone.
He is Helmut Schlesinger, 87, who served as the President of Germany's central bank, the Bundesbank, from 1991 to 1993. He is Helmut Schlesinger, 87, who served as the president of Germany's central bank, the Bundesbank, from 1991 to 1993.
His remarks will only add to the pressure on the ECB to consider increasing Europe's interest rates.His remarks will only add to the pressure on the ECB to consider increasing Europe's interest rates.
Mr Schlesinger said he was worried about price rises across the developed world. Interest rates, he observed, were often between nought and 1%, while inflation was somewhere between 2% and 5%.Mr Schlesinger said he was worried about price rises across the developed world. Interest rates, he observed, were often between nought and 1%, while inflation was somewhere between 2% and 5%.
"That is not good in the long-run for the economy," Dr Schlesinger warned."That is not good in the long-run for the economy," Dr Schlesinger warned.
Eurozone inflation was 2.4% in January, breaching the ECB's core target for inflation close to, but not above 2%.Eurozone inflation was 2.4% in January, breaching the ECB's core target for inflation close to, but not above 2%.
'Common source''Common source'
He noted that many economists argued inflationary pressures were short-lived because they sprang from higher consumer taxes and rising commodity prices.He noted that many economists argued inflationary pressures were short-lived because they sprang from higher consumer taxes and rising commodity prices.
People were not asking, he added, if all these price increases in different markets had "one common source".People were not asking, he added, if all these price increases in different markets had "one common source".
"Frankly speaking in my opinion, the common source is a monetary phenomenon," he said, partly caused by "the policy of central banks"."Frankly speaking in my opinion, the common source is a monetary phenomenon," he said, partly caused by "the policy of central banks".
He was referring to banks that have kept interest rates at historic lows and created money through quantitative easing.He was referring to banks that have kept interest rates at historic lows and created money through quantitative easing.
In his view, there had been a "hesitation" to raise rates because of the perceived risk to jobs and growth.In his view, there had been a "hesitation" to raise rates because of the perceived risk to jobs and growth.
But, he argued, "inflation is in the end not a stimulus for growth and employment. Long term it has a negative influence".But, he argued, "inflation is in the end not a stimulus for growth and employment. Long term it has a negative influence".
Historic perspectiveHistoric perspective
The former central banker is identified with the crusade for low inflation, which was led by Germany's Bundesbank, long before the ECB was created to run monetary policy in the new single currency area.The former central banker is identified with the crusade for low inflation, which was led by Germany's Bundesbank, long before the ECB was created to run monetary policy in the new single currency area.
The hardline Bundesbank approach was shaped by Germany's history.The hardline Bundesbank approach was shaped by Germany's history.
When the bank was created in 1957, it was designed to prevent any repeat of the hyper-inflation that wiped out the savings of Germans after both world wars.When the bank was created in 1957, it was designed to prevent any repeat of the hyper-inflation that wiped out the savings of Germans after both world wars.
"We were forced to keep the value of the currency stable," Dr Schlesinger said. "This was our primary task.""We were forced to keep the value of the currency stable," Dr Schlesinger said. "This was our primary task."
He admitted the bank was not always successful, however.He admitted the bank was not always successful, however.
"We were only one country in a world where inflationary processes were very strong," he said."We were only one country in a world where inflationary processes were very strong," he said.
But for West Germans, the idea of "sound money" became a kind of national faith, with the leaders of the Bundesbank its high priests.But for West Germans, the idea of "sound money" became a kind of national faith, with the leaders of the Bundesbank its high priests.
Change of focusChange of focus
Now, Dr Schlesinger has joined a band of critical voices calling for action to deal with rising inflation in 2011. Now, Dr Schlesinger has joined a band of critical voices calling for action to deal with the rising rate of inflation in 2011.
Eurozone interest rates have been held at the record low of 1% for more than a year and a half.Eurozone interest rates have been held at the record low of 1% for more than a year and a half.
But with inflation rising above the ECB's target, market expectations of a rate rise this year have increased.But with inflation rising above the ECB's target, market expectations of a rate rise this year have increased.
The bank's president, Jean-Claude Trichet, made it clear in January that the ECB would be ready to raise rates, if inflation picked up.The bank's president, Jean-Claude Trichet, made it clear in January that the ECB would be ready to raise rates, if inflation picked up.
No-one expects a rate rise in the next month or two.No-one expects a rate rise in the next month or two.
But recently the ECB halted its emergency purchases of eurozone government bonds, which might change its focus from fighting the debt crisis to dealing with inflation.But recently the ECB halted its emergency purchases of eurozone government bonds, which might change its focus from fighting the debt crisis to dealing with inflation.
Dr Schlesinger, the guardian of Germany's anti-inflation doctrine, was asked if he would vote for a rise in Europe's interest rates if he sat on the ECB's rate-setting committee.Dr Schlesinger, the guardian of Germany's anti-inflation doctrine, was asked if he would vote for a rise in Europe's interest rates if he sat on the ECB's rate-setting committee.
He paused and replied diplomatically that he was convinced the bank's leaders were studying the inflation situation very carefully.He paused and replied diplomatically that he was convinced the bank's leaders were studying the inflation situation very carefully.
"This is one point that calms me," he said, "that makes me relatively certain they will not be shy of changing their extremely easy money policy to have later on an increase in interest rates.""This is one point that calms me," he said, "that makes me relatively certain they will not be shy of changing their extremely easy money policy to have later on an increase in interest rates."