Very low European Central Bank interest rates could lead to excessive risk-taking but it is up to supervisors to mitigate these risks as ECB policy is clearly doing the job intended, Central Bank Governor Philip Lane said last night.
Professor Lane, who is also a Governing Council member of the ECB, said low interest rates posed the dual risk of creating property bubbles and, if sustained too long, contributing to economic stagnation.
"A possible side-effect of the low interest rate environment is that it may induce some asset and real estate market participants to engage in excessive risk-taking," Professor Lane said.
He made his comments in a speech at New York University.
The risk of property bubbles is mitigated by the ECB's Single Supervisory Mechanism's regulation of the lending practices of the 129 most important European banks and by the actions of national macro-prudential authorities in each EU state.
National fiscal policies can also play a role in mitigating the financial cycle, he said.
The other main risk of ECB policy is a "'low for long' stagnation scenario," but acting decisively to lift inflation to its target level is the best way to avoid this, Professor Lane said.
"Forceful accommodative monetary policy in the short run is the best method to ensure that policy rates do not stay low for longer than is necessary," he added.