Issing Says Officials May Have to Ignore Political ‘Screams’

By Matthew Brown and Frances Robinson

Aug. 6 (Bloomberg) -- Otmar Issing, former chief economist of the European Central Bank, said inflation will pick up as soon as the financial crisis has passed unless governments and central banks remove economic stimulus measures promptly.

“Politicians and industry might scream” when the measures are withdrawn, “but this should not be an argument for central banks and fiscal policies,” Issing said in a telephone interview from Frankfurt yesterday. The exit “has to happen at a time when unemployment is still high or even still rising, because of the lagged effect of the crisis on labor markets.”

Policy makers worldwide have pumped money into their economies in a bid to counter the worst recession since the Great Depression. While some officials have warned about the inflation risks associated with increased money supply, others say removing the stimulus too soon may stymie a nascent economic recovery as rising unemployment damps consumer spending.

“As we have seen the strongest expansionary policies, fiscal as well as monetary, in the history of the world, I think it is rather straightforward that as soon as the crisis is behind us, inflationary pressures will emerge unless policies change course in a timely manner,” Issing said.

The ECB has cut its benchmark interest rate to a record low of 1 percent, offered to lend banks as much money as they need and started buying 60 billion euros ($86 billion) of covered bonds in a bid to get credit flowing again. The Federal Reserve and Bank of England have gone further, reducing their key rates to close to zero and buying government and corporate bonds.

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Issing said that, “given the size of expansionary packages and the impact of monetary policy,” most economies will recover from recession at about the same time.

“The question is whether there will be a strong or weak recovery,” he said. “There are arguments that the recovery will be rather moderate. But even a moderate recovery is better than staying in this stagnation.”

ECB policy makers convene in Frankfurt today to discuss monetary policy. Issing, 73, retired from the bank in May 2006 after serving an eight-year term.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Frances Robinson in Frankfurt at frobinson6@bloomberg.net