FRANKFURT, Nov 17 - European Central Bank Chief Economist Otmar Issing was quoted as saying on Monday that euro zone inflationary expectations in financial markets had risen for a longer time and by more than was appropriate. "The increase in inflationary expectations has now been lasting longer and has also gone further than I would think desirable," Issing told the Swiss newspaper Tages-Anzeiger in an interview. Consistently low inflationary expectations over the last few years are a key argument the ECB uses to explain why its policy to keep inflation below two percent has been successful -- even though actual numbers have often exceeded that threshold. But the market expectations, derived from bond prices and consensus forecasts measured by the ECB, have started to rise recently. Issing's word are a first indication the central bank is worried about this and might react sometime next year by hiking interest rates. Issing also said there were now more signs of an economic upturn, with assessments of both current conditions and future expectations on the rise in confidence surveys. But consumers remained cautious.
The European Central Bank left its benchmark interest rate unchanged at a record low of 2.00 percent at its November meeting and most economists expect it to remain on hold until well into next year to gauge the recovery's strength. There would be no immediate monetary policy reaction from the ECB even if the EU created more leeway for France and Germany in interpreting the bloc's rule for fiscal discipline in a debate that is expected to reach a conclusion this month, Issing said. "All ideas that we would immediately react in our monetary policy to any outcome (of the debate) surpass reality. Euro zone finance policy is one exogeneous factor amongst many that serve as an input to our forecasts," Issing said. But he admitted the discussion on the EU's Stability and Growth Pact had come to boiling point and the situation was now 'very critical'. The EU Commission has granted France one extra year to bring its budget deficit below three percent of GDP in return for a bigger reduction of the structural deficit, adjusted for economic swings, a demand France has said it cannot meet. Germany has also said it will top the three percent cap next year, also for the third time running. A finance ministers' meeting later this month is expected to reach a conclusion on how to proceed.//