ECB's Draghi Says Low Interest Rates Necessary Now To Attain Higher Rates Ahead

Low interest rates are necessary today for a return to higher rates in the future and other policy areas must contribute much more decisively to reap the full benefits of monetary policy, European Central Bank President Mario Draghi said Wednesday.

Speaking in the German parliament Bundestag, Draghi said, "The ECB is vigorously counteracting risks to price stability using all necessary tools within its mandate."

"What we need now is to allow our measures to develop their full impact," he said.

Measures adopted already are working, Draghi said. They are helping the economic recovery, thus creating jobs and benefiting savers and pensioners, he said, while acknowledging the concerns expressed by some.

A strong and sustainable recovery cannot be achieved without contribution from other economic policies, he added.

"The ECB does not operate in a vacuum: other economic policies are essential to complement our monetary policy," the ECB Chief said. "These other policies are a precondition for interest rates to rise again."

In a low interest rate environment, savers earn satisfactory rates of return from diversifying their assets, Draghi said, citing some Bundesbank studies.

"But most importantly, whatever financial assets savers hold, they will benefit from a recovery of the economy," he said. "So the interest of all of us, including German savers, is the highest possible sustainable growth in Germany and the euro area."

Draghi dismissed the notion that the ECB's monetary policy is the main factor behind the low profitability of Eurozone banks. Such institutions need to address their own structural issues, such as overcapacity, the stock of non-performing loans and the potential impact of technological innovation, he said.

"What has been forgotten is that many banks have been able to more than offset declining interest revenues with higher lending volumes, improved loan performance and lower interest expenses, all of which are beneficial to both the banks and their customers," Draghi said.

"Low profitability is closely linked to low operational efficiency."

Draghi also acknowledged that low interest rates for a long period might carry the risk of overvaluation in asset markets as a result of the search for yield.

While there are no sign of any overheating in the euro area or the German economy as a whole, a somewhat stronger increase in residential real estate prices, notably in large cities in Germany, have been observed, the central bank chief said. However, such increases are not the reflection of a bubble, as lending is growing only moderately, he pointed out.

"Where signs of excessive risk-taking emerge, macroprudential measures at the national level should be the instrument of choice," Draghi said.

He also urged policymakers across the euro area to implement structural reforms that can boost investment opportunities so that productivity and employment can be raised.

by RTT Staff Writer

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