Deutsche Bank AG Chief Economist Thomas Mayer said it is “dangerous” for the European Central Bank to keep interest rates low for long.
What “I find dangerous is that we continue to get locked into this very low rate environment,” Mayer told a conference in New Delhi yesterday. “I am concerned that by keeping rates low for an extended period of time you are inducing people to build other decisions onto this low rate environment and adjust all their portfolio and investment decisions on these low rates.”
The ECB may raise borrowing costs next month to curb price pressures, President Jean-Claude Trichet said March 3 after keeping the benchmark at a record low of 1 percent even as inflation breached the bank’s 2 percent limit. The euro completed a third straight weekly increase against the U.S. dollar yesterday, the longest run of gains since October following his comments.
The ECB may raise rates by a quarter of a percentage point in April, Deutsche Bank’s Mayer told the event organized by the Institute of International Finance. He expects further quarter-point increases in September and December.
Trichet accompanied his rate warning by again urging governments to complete their budget cut plans this year even if that requires more austerity.
He has said for months that governments can’t keep relying on the ECB’s cheap credit to prop up the region’s economy as they split over providing a permanent cure to Europe’s sovereign debt crisis which first engulfed Greece, then Ireland and may next take down Portugal.
“European leaders have said that they will do whatever it takes to make sure the affected nations and their banks have access to financing as they implement very challenging, multiyear programs of fiscal, structural, and financial reform,” Lael Brainard, the U.S. Treasury Department’s undersecretary for international relations, said at the conference in New Delhi. “European officials are now at work on a longer-term framework to strengthen and redesign the financial mechanisms put in place to support economic reform.”
Growth in the member countries of the Organization of Economic Cooperation and Development looks “mediocre,” Secretary-General Angel Gurria told the conference.
The International Monetary Fund’s European Department Director Antonio Borges said at the meeting that the solution to the European crisis is greater integration.
High commodity costs, which are driving up price expectations, were among the challenges discussed at the conference.
Political tensions in Libya, the latest country to experience a wave of anti-government protests in North Africa and the Middle East, sent oil toward its sixth weekly gain in London.
Federal Reserve Chairman Ben S. Bernanke said on March 1 that the surge in oil and other commodity prices probably won’t cause a permanent increase in broader inflation and repeated that U.S. borrowing costs are likely to stay low.
A slack labor market will mute commodity-price inflation in the U.S., Brainard said yesterday.
The U.S. economy is in its early stages of recovery and may expand 3.5 percent to 3.9 percent in 2011, Terrence J. Checki, executive vice president for emerging markets and international affairs at the Federal Reserve Bank of New York, told the conference.
New York Fed President William Dudley, who is also the vice chairman of the policy-setting Federal Open Market Committee, said in a speech on Feb. 28 that the “considerably brighter” economic outlook isn’t yet reason for the central bank to withdraw its record monetary stimulus.
“I think you can look at comments of Bill Dudley in recent days. They are pretty clear on where they stand, on where they see monetary policy going,” Checki told reporters in New Delhi yesterday when asked about the outlook on U.S. rates.
By contrast, China, the world’s fastest-growing major economy, on Feb. 8 raised rates for the third time since mid-October. India’s central bank has raised its benchmark repurchase rate seven times in the past year while three of the Bank of England’s nine policy makers last month voted for an increase.