Mario Draghi has dismissed concerns that loose monetary policy may be fuelling bubbles that threaten financial stability, despite the European Central Bank (ECB) warning bond markets could be exposed to turbulence.
The ECB president said the bank took the risks from historically loose monetary policy into account, but said the danger was “contained”.
In its efforts to boost the European recovery by encouraging more lending the ECB has kept interest rates at rock bottom, but some economists have expressed concerns about bubbles in sectors like real estate swelling with access to cheap money.
However, Draghi said: “Our current assessment is that there is no widespread emergence of imbalances, but there remain some localised areas that require continued close monitoring and vigilance.”
Draghi also reiterated his view that quantitative easing has been “instrumental” in supporting a “resilient recovery” in the Eurozone.
The quantitative easing programme of bond buying increased demand for a broad range of securities from governments and corporations in an effort to force money into lending to the broader economy, raising concerns plunging prices could cause a market shock when the ECB sells the assets.
A similar move in the US caused the 2013 “taper tantrum”, when markets were roiled by US Federal Reserve plans to slowly stop buying bonds. However, Draghi said a stronger financial system and better supervision had reduced the risks to the system when the ECB eventually stops buying bonds.
The central bank is still buying €60bn in assets per month until the end of 2017, with investors wary of the scale and timing of the central bank’s next move.
At the same time the ECB earlier warned that European bond markets could be impacted by the spillover from rising interest rates in the US. Higher returns in the US would prompt investors to move money out of European bonds, sending yields, which move inversely to prices, soaring.
Europe’s banks could also be under threat if political concerns rise, the ECB said. The central bank warned the risks of “debt sustainability concerns” coming back to the fore had risen since November, when it last carried out a systemic review of financial stability.