European Central Bank board member Joerg Asmussen said there are risks in keeping interest rates low for a long time.
“If interest rates stay too low for too long this would reduce the incentives for governments, corporates and banks to adjust,” Asmussen said today in a speech in Frankfurt. “So the costs of very low interest rates are real.” He also said the effect of any further rate reductions may only be “limited” because they are not being passed on in the economies that need them most.
With doubts growing about the ECB’s projection for an economic recovery later this year, policy makers have signaled they are looking at a range of measures, including cutting interest rates further. Banks including Nomura International Plc, UBS AG and Royal Bank of Scotland Group Plc forecast the ECB will reduce its benchmark rate when officials convene for their monthly meeting on May 2.
“Rate cuts would further relax the already unprecedented easy financing conditions in the core” of the euro area, Asmussen said. “This is not per se a problem, but interest rates that are too low for too long can eventually lead to distortions, could lead to misallocation of resources, which ultimately leads to lower growth potential.”
Asmussen said the ECB can’t emulate the policies of the Bank of England, Bank of Japan and Federal Reserve.
“Many people ask why doesn’t the ECB do more, why doesn’t it copy the measures of the Bank of England, the Fed or the Bank of Japan,” he said. “We have to respect our mandate, which is price stability. That means that there are certain ideas, like higher inflation, target the rate of unemployment, these are ideas that we simply cannot entertain.”