BERLIN (MNI) – European Central Bank Executive Board member Juergen
Stark warned Thursday that keeping interest rates too low over a long
period of time can lead to new imbalances.

“In the course of our policy we have to keep in view that a
monetary policy which keeps interest rates over a very long period of
time at too low a level and provides at the same time a high amount of
liquidity can potentially be dangerous,” Stark said in remarks prepared
for delivery at a conference in Vienna.

Such a policy can set the wrong incentives and hurt economic growth
over the medium term, he warned.

Moreover, “a long period of very low interest rates can become the
basis for new financial and economic imbalances,” he argued, noting that
across the globe, interest rates are currently “extremely low and we
have an outright liquidity glut.”

The Executive Board member said that “a farsighted monetary policy
must consider such risks.” The ECB has to orient all of its actions
towards the goal of assuring price stability, he stressed.

He said the ECB Governing Council would continue to “eye all
developments very carefully.”

Stark’s comments come a week after the ECB signaled an end to its
nascent tightening cycle, as bank’s president Jean-Claude Trichet said
the Council had decided inflation risks were now “broadly balanced” and
no longer tilted to the upside.

Stark, often using very much the same arguments he used in his
speech tonight, had been one of the chief advocates of the ECB’s
decision to launch a rate tightening cycle, which produced hikes in
April and July. He has urged that the central bank end its unlimited
liquidity policy as soon as possible, but the ECB decided in August to
extend it through the end of the year. Stark was also a strong opponent
of the bank’s decision in early August to renew its bond buying program
in order to defend the sovereign borrowing capacity of Italy and Spain.

With the ECB’s policy seeming to contradict him on nearly all
fronts, Stark announced his resignation six days ago, though he only
cited “personal reasons.”

In his remarks this evening, Stark, who is the ECB’s chief
economist, noted that monetary liquidity in the Eurozone is still ample.
However, it can be assumed that the bulk of it is kept for precautionary
reasons and not for transactions, he noted.

Higher demand for central bank liquidity can be seen as a sign of
declining confidence among banks in the Eurozone, Stark observed.

He warned that there will be no simple and swift solution for the
European debt crisis. “Eurobonds are no solution for the debt crisis,”
he cautioned.

The sovereign bond market is very important for overall economic
stability, Stark pointed out. “That is why the ECB has warned early on
that a disorderly default of a state in the Eurozone could cause a new
financial crisis,” he said.

Nonetheless, Stark demanded that Greece should receive the next
tranche of fiscal aid only if it meets the conditions of its
consolidation and reform program. “If Greece does not meet the
conditions, this must have consequences,” he stressed.

Other major industrialised countries, especially Japan, the US and
the UK, also have high public and private debt levels, Stark remarked.
“This is a reason for great concern, because substantial risks for
global financial and economic stability arise from this indebtedness,”
he said.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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