ECB’s Noyer: Low Rates For Too Long Create Big Risks
AIX-EN-PROVENCE, France (MNI) – If central banks leave interest
rates too low for too long, they will create major financial risks for
the future, European Central Bank Governing Council member Christian
Noyer warned on Friday – one day after the ECB cut its key policy rate
to a record low of 0.75%.
“When they set interest rates low or at zero, they contribute to
stabilizing their economies during the crisis,” Noyer acknowledged at a
“But if they prolong this action, these rates create distortions,”
he cautioned. “They encourage the creation of bubbles and they create
risks for long-term investments.”
Noyer, who heads the Bank of France, noted that world’s major
central banks – though the ECB on a “smaller scale” – had intervened
during the crisis to defend financial market stability. However, “no
central bank has engaged in or envisions engaging in the monetization of
deficits with the intention of reducing the weight of the debt through
inflation,” he declared. “That, in my opinion, is a fantasy of market
“To the contrary, we have witnessed in the past six months a
reaffirmation of the anti-inflationary objective of monetary policies,”
he said, noting that the Federal Reserve has for the first time given a
definition of price stability that is “identical” to the ECB’s.
Echoing recent comments by some of his ECB colleagues, Noyer
cautioned that the capacity of central banks to intervene in the current
circumstances is limited.
Central banks “can remedy the temporary dysfunction in the markets.
They can remedy the [lack of] liquidity caused by the uncertainty, and
they have done so with an amplitude unmatched in history,” he said. “But
they cannot permanently substitute for the financial markets and banks
to replace failed financial intermediation.”
Noyer noted that there is a “general and exceptional uncertainty
weighing on markets” which is causing investors to prefer liquid, safe
assets and shun longer-term investments.
The dysfunction in markets means that global savings are not going
where they would be most fruitful and efficient. In the U.S. and the
U.K., he noted, interest rates are historically low and real rates
negative, despite deficits above 10% of GDP. “This leaves big questions
about the future trajectory of their debt.”
He also noted that the coffers of corporate treasuries are at
levels “never before achieved,” and yet there are potentially profitable
investments – in infrastructure and the production of raw materials –
that are “not being exploited.”
Noyer noted that the relationship between the emerging economies
and the industrialized ones is “a complete reversal from twenty years
ago” when the poorer countries sought debt relief from the Paris Club.
Now the average debt ratio of the industrialized world is 100% of GDP,
compared to 30% in the emerging market economies.
The need for the industrialized countries to reduce their debt
creates a major dilemma for the global economy, Noyer said. He noted
that the world’s seven richest countries alone account for 56% of world
“How can this consumption grow? If we need to reduce the debt, we
must save. And if consumption stagnates, what happens to growth –
especially in the emerging countries, which have based everything on the
development of exports?” Noyer wondered. “We need the emerging countries
to continue to invest in the advanced countries.”
Noyer lamented the fact that it was now acceptable to speak
publicly about the possibility of default by an industrialized country –
a change in public discourse no doubt engendered by Greece’s partial
default earlier this year.
“It’s not good for the big developed countries to cast doubt on
their own solvency, to suggest that in certain circumstances they might
fail to reimburse their debt fully,” he said.
The Bank of France chief also noted what he called a
“schizophrenic” attitude of both financial markets and authorities –
desiring at the same time a sharp reduction in outstanding debt and yet
coveting the deep, liquid and – in some cases — safe markets that those
It is ironic, he said, that investors want access to these bonds,
yet the more of them that are created, the riskier they become.
–Paris newsroom, +331-42-71-55-40; firstname.lastname@example.org
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