European Central Bank President Mario Draghi on Monday warned against keeping interest rate at a low level for a protracted period, saying that this may create a number of challenges, including formation of asset price bubbles.
"Protracted monetary accommodation may fuel bubbles in house prices and other asset markets," he told European lawmakers in Brussels. "As the crisis has painfully demonstrated, the bursting of such bubbles inflicts large costs for the real economy," Draghi said.
According to him, a protracted period of low interest rates and ample liquidity may lead to a situation were banks have less incentives to monitor credit risk properly as it facilitates rolling-over loans at very low costs. As a result, banks may provide too many loans to non-profitable business.
Draghi cautioned that such misallocation of financial resources would undermine overall productivity and depress growth and employment overtime.
He said the "risks to the outlook for price developments are broadly balanced over the medium term with upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate."
Draghi said he expects economic weakness in the early part of 2013 to be followed by a very gradual recovery later in the year. Strengthening global demand, ECB's accommodative monetary policy stance and the improvement in financial market confidence across euro area should support the recovery going forward, he added.
He told lawmakers that "any language referring to currency wars" was "really excessive." He urged all parties to exercise "strong verbal discipline."
by RTT Staff Writer
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