"Fellow ECB council member Erkki Liikanen said in a separate interview in Washington yesterday that "it's very important" the central bank brings inflation back below 2 percent within 18 months. Both Liikanen and Quaden said it was vital the bank control inflation expectations."
I think Erkki Liikanen is right to be worried. In Finland, price stability is something you will find in museum, it's a thing from the past...
Ask people in the street, they all think that price is only going up and in a double digit way. The (price) anchor is long gone. And why is that? too little,too late and a policy mistake made in 2003 by pushing interest too low for too long.
Basically they underestimated the growth in emerging markets and the inflation that will be exported.
They relied too much on financial institutions and market and too little on regulation, as a result the system went too far into believing that debt can be accumulated without risks. Now, the financial system is deleveraging and is not willing to take risk ...well at least, that's the story on the other side of the atlantic (read U.S. & U.K.)
In Europe, it's another story. Bank are saying that they will tighten but no sign whatsoever of it. Just look at Finland, borrowing to private household for housing purchase is still at a double digit rate (based on data published by the BOF -Bank Of Finland) albeit slowing.
It's surprising, but that's the way Finland has never known boom and stability but instead boom and bust... well yesterday, it was the boom...
By the way the Finnish technique to dis-anchor inflation expectation is either by some kind of cartels or by setting up price too high for too long so to distort the value of "money".
One example, a pair of shoes at over 100 euro were not so common in shops. About a year ago you started to see them in shops, strangely enough in any shops. Now people will think that buying a pair of shoes at 50 euro will be a bargain when only 3 years , a "300 mark" shoes will be a luxury...
PS: for your information, interest rates won't go up until september, unless you have a catastrophe in between.
PS2: 18 months, bring us to 2010..looks like every decade, we have a nasty recession...
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