FRANKFURT (MNI) – The ECB’s loose monetary policy doubtlessly
helped contain the financial crisis, but ultimately the disadvantages of
maintaining interest rates at a low level will outweigh benefits, the
Dutch National Bank argued Thursday in its annual report.
Crisis measures will come to an end as soon as markets are
sufficiently normalized, the central bank added.
Furthermore, though the world economy is recovering, growth is not
nearly balanced, and in fact macroeconomic imbalances from before the
crisis persist even now.
“Although the loose monetary policy has undeniably contributed to
containment of the crisis, sooner or later the disadvantages of a
sustained policy of low interest rates will get the upper hand,” the
central bank wrote.
“In the first place, it discourages debt reduction. Secondly, a low
key policy rate incites banks to make maximum use of the ECB’s
facilities,” it concluded.
The ECB’s program of buying government bonds is completely
different than the policy of quantitative easing in the United States,
the Dutch Central Bank reiterated.
“All the same, the options at the monetary authorities’ disposal
are gradually being exhausted, also in view of the risks for central
banks’ balance sheets,” the bank said.
“Born from necessity, the said crisis measures will be phased out
as soon as the markets are sufficiently normalised,” DNB added.
Over the long run, “the combination of very loose monetary
conditions, implicit and explicit state guarantees, extensive purchasing
programmes and the associated balance sheet expansion of central banks
could hinder the stable development of the global economy in the longer
term,” the bank argued.
Even though Eurozone inflation has exceeded the “critical limit of
2%,” due to higher energy and food prices, core inflation “is still
quite moderate,” the DNB argued. “And the public’s expectations of
future price developments match the definition of price stability as
used by the ECB.”
“Nonetheless, concerns prevail,” namely from price developments in
emerging countries and “sharply increased commodity prices.”
The bank warned about the risks to the ECB’s monetary policy from
divergences both in growth and price developments in the single currency
“In the second place – and related thereto – the robust economic
upturn in Germany clearly shows that a resurging economy is attended by
a higher inflation rate and hence requires higher key policy rates,” the
“However, the ECB will not be in a position to meet that need
(fully) if inflation rates elsewhere in the euro area are significantly
lower than 2% and in some countries possibly even negative,” the bank
More worryingly, “The longer this situation persists, the harder it
will become for the ECB to assert its credibility among the citizens of
the largest member state, which is known for its instinctive aversion to
inflation,” the bank cautioned.
“The world economy is recovering, although the growth is still not
balanced,” the DNB said.
“With economic growth of close on 3%, the US seems to be back to
its pre-crisis growth path. However, this figure is partly attributable
to the unprecedented stimuli from the federal government and the Federal
Reserve System,” the central bank explained.
The Dutch bank also raised the possibility that growth might slow
in the world’s largest economy once stimulus is withdrawn. “So part of
the current growth is being bought on tick, and it remains to be seen
how long that can be sustained.”
“As long as the supply of unsold homes continues to expand and the
unemployment rate remains high, no structural improvement in the picture
“All in all, the pre-crisis macroeconomic imbalances are still
firmly in place,” the bank emphasized.
“A new, but not unexpected, factor is the increasing inflationary
pressure in Asia, caused by briskly rising food prices and wages,” it
Higher energy and commodities prices will likely stay for some
time, the central bank predicted, confirming that “part of the rise in
energy and commodities prices can be assumed to be structural.”
“All of this carries risks for the global inflation picture, also
in view of the deficit financing and loose monetary conditions in the
industrialised world, which attract extra capital flows to emerging
markets,” it added.
“In any case, it looks as if the spectre of deflation has made way
for the danger of rising inflation, possibly with the exception of some
seriously affected European countries,” the bank noted.
–Frankfurt bureau, +49-69-720142, email@example.com