MADRID (MNI) – The monetary stimulus provided by ECB and other
central banks was justified by the financial crisis but could cause
inflation risks and asset price distortion if left in place for too
long, ECB Executive Board member Jose Manuel Gonzalez Paramo said
Thursday evening.

In the text of remarks delivered in Madrid, Paramo also warned that
the spiraling deficits and debt of Eurozone countries – and others –
could harm long-term growth prospects if not reined in as soon as
possible. At the same time, however, he warned that a premature return
to fiscal tightening could push economies back into recession.

By getting budgets under control, Paramo said, governments can
reduce pressure on prices and on interest rates, giving central bankers
more time to unwind surplus liquidity measures and other stimulus they
have provided during the crisis.

“As the economic and financial situation normalizes, it is
important to reverse the exceptionally accommodative orientation of
monetary conditions at which we have arrived with the implementation of
historically low interest rates and extraordinary measures of credit
support,” Paramo said.

“Undoubtedly, if a significant improvement in the outlook for
economic activity were not accompanied by an adequate adjustment in the
path of monetary policy, the current monetary conditions could be
excessively loose, thus creating risks for price stability,” he added.

He noted that past experience has led many economists to conclude
that a long period of expansive monetary policy could lead to credit
terms that are too lax and “gravely distort the prices of financial
assets” due to speculative behavior on the part of market operators.

“The extraordinary monetary policy measures adopted by the
Eurosystem were conceived of as a temporary strategy,” he said. “In
general terms, the gradual withdrawal of the extraordinary measures is
essential in order to maintain private sector inflation expectations
firmly anchored.”

Were those expectations to become unanchored, he said, it could
lead to “a series of adverse factors,” including a rise in risk
premiums, greater inflation risks, and interest rate volatility.

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–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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