August 19, 2011 / 8:09 AM / 7 years ago

ECB's Stark: risky to keep rates too low for long

FRANKFURT (Reuters) - European Central Bank policymaker Juergen Stark dismissed the idea of common euro zone bonds being a solution to the currency bloc’s debt crisis and said leaving interest rates too low for too long was risky.

The pace at which the ECB would continue its bond-buying program, and the volume of bonds it purchases, would depend on tensions on financial markets, Stark said in an interview with German business daily Handelsblatt published on Friday.

Turning to monetary policy, Stark warned against too-low interest rates.

Noting that the Frankfurt-based central bank had never cut its main interest rate to an extremely low level, he added: “Keeping interest rates too low for too long carries risks.”

“Such a policy contributes to excessive risk-taking and wrong investments and therefore undermines an economy’s growth potential,” he said.

The ECB has raised interest rates twice this year — in April and July — by 25 basis points each time. Its benchmark rate now stands at 1.5 percent.

Euribor futures show markets have priced out further interest rate hikes for the next couple of years and also see around a 30 percent chance that the bank may be forced to cut rates again.

Turning to the sovereign debt crisis, Stark said the idea of common euro zone bonds was a “false solution, which ... provides completely wrong incentives.”

Stark, a German who holds the economics portfolio on the ECB’s six-member Executive Board, was one of four members of the ECB Governing Council who earlier this month opposed the reactivation of the bank’s bond-buying plan.

The six Executive Board members sit on the ECB’s 23-member Governing Council, which also compromises the euro zone’s 17 national central bank governors.

Stark noted that the ECB’s move on August 4 to offer a round of six-month financing to banks “fulfilled all the liquidity requirements of the banks.”

“We have given here enough liquidity to the banks with a total of 50 billion euros. From the present standpoint, this is a one-time measure,” he said.

Asked how long the ECB would keep buying bonds and in what amount, he said: “The speed and volume will depend on the ECB Governing Council’s assessment of the market situation ... What is decisive is how long tensions in the markets persist.”

Reporting by Ludwig Burger and Marilyn Gerlach; Editing by Catherine Evans

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