European Central Bank official Juergen Stark says leaving interest rates too low for too long is risky, highlighting reservations at the ECB about reversing policy course despite markets' recession fears.
The ECB has raised rates twice this year but market worries that major economies are heading for recession and a vow by the US Federal Reserve to keep its rates near zero for two years have put pressure on the ECB to abandon its tightening cycle.
ECB executive board member Stark resisted this pressure in an interview with Germany's Handelsblatt. The ECB raised its main interest rate in April and July - by 0.25 points each time - and it now stands at 1.5%.
Stark also told the newspaper that the ECB was taking signs of interbank lending market tension seriously but feels the situation is less dramatic than in 2008.
'Banks in certain regions of the euro zone prefer to deposit their surplus cash with the ECB rather than lending it to other banks. We take these signals seriously,' Stark told the German business daily Handelsblatt.
Euro zone banks placed €90.5 billion with the ECB overnight from Thursday to Friday, an increase from the previous day and the highest level since August 8 when it was €145.2 billion.
Stark noted however that 'the situation is not comparable to that in the autumn of 2008 after the failure of Lehman Brothers,' a US investment bank that went bankrupt in September of that year, with the result that a year-old financial crisis then became a global economic crisis. Interbank lending markets seized up at that point, forcing central banks to open the cash taps.
Stark also expressed scepticism regarding the chances of a eurobond being created to help heavily indebted euro zone governments. Common bonds 'are a transfer union' that some in the euro zone, especially Germans like Stark, have repeatedly warned against.
Critics of a transfer union say it would simply allow those who have run up heavy debts to obtain financing from others who have scrupulously balanced their own accounts, and weaken pressure on the former to get their finances in order.
'It's a face-saving solution that sends the wrong signals,' Stark commented. 'We would need a European constitution with sovereignty transfers from all countries. Only then would eurobonds mean anything,' the economist added.
