FRANKFURT (Reuters) - The longer the European Central Bank sticks with its ultra-low interest rates and provision of unlimited liquidity to banks, the less effective they become, ECB Executive Board member Peter Praet said on Wednesday.
The ECB has cut its main refinancing interest rate to a record low of 0.75 percent and started to provide banks with as much funds as they want, including ultra-long 3-year loans.
It has also pledged to buy government bonds, if asked, of countries that have applied for European Union bailouts and keep to the terms of related austerity programs.
“The longer we carry on with a highly accommodative monetary policy, characterized by extremely low interest rates and excess liquidity in the banking system, the more we will see a phenomenon manifesting itself with greater and greater evidence,” he said.
“I am referring to what used to be known as ‘instrument instability’ in policymaking: the need to apply larger and larger doses of the same policy interventions only to see their macroeconomic influence becoming more and more tenuous.”
Continuing such policies might also reduce banks’ incentives to clean up their balance sheets and downsize their operations, Praet said.
Low interest rates can also reduce governments’ drive to cut down deficits, he added.
ECB President Mario Draghi said last month that the central bank was not thinking about the exit now, even as he acknowledged some improvement in financial markets.
Praet, who has the influential economics portfolio among his tasks at the ECB, said, however, that the crisis policies have enabled the ECB to achieve its first and foremost goal of stable prices and “have helped repair the monetary policy transmission mechanism”.
But its emergency provision of unlimited liquidity and bond purchases are temporary in nature, Praet said.
The euro zone economy, while still weak, is starting to show signs of life, Praet also said.
“The green shoots of a nascent recovery ... can already be observed,” the Belgian said, but poured cold water on hopes of rapid growth will return soon.
“Cautious optimism does not entail a naïve expectation that the ‘land of milk and honey’ is just around the corner,” Praet said.
Reporting by Sakari Suoninen and Paul Carrel; editing by Patrick Graham