Bundesbank’s Dombret Says ECB Must Not Lose Sight of Exit

Bundesbank board member Andreas Dombret said the European Central Bank must begin to withdraw its emergency policy measures as soon as an exit is justified, and warned that leaving interest rates low for too long can fuel asset-price bubbles.

“Monetary policy cannot lose sight of the exit from extraordinary measures and must act when an exit is warranted,” Dombret said in a speech in Hamburg today. Banks shouldn’t rely on low interest rates and policy makers should remember the risks inherent in cheap credit, he said.

Germany’s central bank has opposed the ECB’s latest efforts to battle Europe’s sovereign debt crisis, such as the announcement of a bond-buying program. Dombret said the Bundesbank will continue to advocate that the right incentives are set.

“Extraordinary monetary-policy measures are no substitute for the budget consolidation and structural reforms that are necessary for a lasting solution to the crisis,” he said.

Dombret also warned that leaving interest rates low for too long can lead to “exaggerations” in asset prices and cited rising property prices in some parts of Germany.

While there may not be a German-wide property-price bubble at the moment, it should be remembered that it was the “bursting of the price bubble on the U.S. mortgage market that triggered the worldwide financial crisis,” he said.

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