FRANKFURT (Reuters) – The European Central Bank’s ultra easy monetary policy may be fuelling asset bubbles, which may in turn trigger future crises, ECB board member Yves Mersch said on Monday, providing an unusually stark warning about the risks of ultra low rates.
The ECB has kept rates in negative territory since 2014 to foster growth but a growing number of experts, including some ECB policymakers, warn that low rates for long could fuel financial instability, putting growth and the banking sector at risk.
“Vigilance is particularly warranted in the light of some signs that monetary policy is encouraging increased risk-taking and contributing to elevated asset price inflation and income inequality,” said Mersch, a policy hawk who has criticized easy policy in the past.
Mersch warned that asset prices, particularly for real estate, are stretched and this “may in turn trigger future crises.”
While Mersch did not directly call on the ECB to increase interest rates, he noted that so-called macroprudential measures, which are implemented by individual euro zone members to cool lending and property markets, may not be fully effective.
Tightening monetary policy to cool asset prices would reduce the likelihood and severity of financial crises but comes at a cost of below-target inflation, Mersch argued.
“That is a trade-off that needs to be balanced carefully, taking into account the risks on both sides,” Mersch said, raising a once taboo topic.
The ECB’s key mandate is price stability and the bank has so far rejected any suggestion of compromising on this goal, arguing that asset bubbles should be fought by others as meeting the inflation target is its paramount objective.
“There is … no clean separation between the pursuit of monetary stability and that of financial stability in the medium term,” he said.
Mersch added that financial stability considerations are already built into the ECB’s strategy but the ECB should consider enhancing this process.
The bank is currently undertaking a one-year strategy review that is expected to redefine its inflation target and study how it achieves this goal.
(Reporting by Balazs Koranyi; editing by Philippa Fletcher)