LUXEMBOURG (MNI) – Asset prices continue to be an essential factor
in the European Central Bank’s approach to making monetary policy
decisions, Governing Council member Yves Mersch said Wednesday.

In the editorial of the latest Financial Stability Review of the
Central Bank of Luxembourg, which he heads, Mersch said that in the face
of “a [financial] crisis of unprecedented violence,” there is renewed
interest in the question of financial market bubbles and their
prevention.

Policymakers hesitate to “lean against the wind” in order to
confront the emergence of such bubbles, in part because it is difficult
to identify asset price imbalances in advance, he said.

Moreover, there is “strong uncertainty” about “the effectiveness of
an interest rate hike of plausible amplitude to contain the
unsustainable growth of asset prices,” he observed.

However, “in the presence of asset price corrections harmful to the
real economy, the immediate interventions of the central banks are
capable of freezing the deviations or softening the rupture of the
initial equilibria,” he said.

As the Eurosystem’s monetary policy framework is based on economic
and monetary pillars, “asset prices and the imbalances relating to them
remain a full-fledged element of the informational flows necessary for
making monetary policy decisions,” Mersch affirmed.

Elsewhere in the review, the Luxembourg Central Bank said the
Governing Council sees risks to growth as balanced. Among the risks, it
cited the possibility that economic agents’ confidence could improve
more rapidly than expected, thus allowing a stronger global recovery.

Measures taken by authorities to mitigate the crisis could prove
more effective than foreseen, it added. However, negative feedback from
the real economy to the financial sector is a downside risk, while oil
and other commodity prices could rebound, the bank said.

“Very accommodative” monetary policy and expansionary budgets
worldwide helped cushion the downturn, but their effects “should weaken
gradually,” the bank said. “As a consequence, the pickup of the world
economy should remain contained, unless private demand turns out to be
more dynamic than anticipated.”

Inflation should stay muted in view of weak capacity utilization
rates and moderate inflation expectations, according to the bank.

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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