ECB chief says low interest rates can cause problems

The head of the European Central Bank on Monday outlined the risks of keeping interest rates low for a long period, suggesting the ECB is unlikely to slash rates further from already record lows.

Speaking to members of the European Parliament in Brussels, Mario Draghi also reiterated the bank's view on the level of the euro on the foreign exchange markets, saying talk of a currency war was "really excessive".

"Naturally, the ECB is aware of the challenges arising from a protracted period of low policy rates," Draghi said, a week after the bank decided to keep its main interest rate on hold at a record low 0.75 percent.

He said that low interest rates for a long time could harm the returns for savers and investors as well as possibly fuelling bubbles in house prices.

In a low interest rate environment, banks might also have less incentive to monitor credit risk properly "and may provide too many loans to non-profitable business," Draghi said.

Draghi said current interest rates were "accommodative", which analysts often take to mean that the bank is unlikely to cut them further.

Turning to the exchange rate, Draghi said: "I find really excessive any language referring to currency wars" amid concerns that the euro is too strong on the foreign exchange markets and worries over the weak Japanese yen.

He referred to the statement made by the Group of 20 countries in Moscow over the weekend, where leading powers vowed they would not target specific forex rates or devalue currencies to make them more competitive.

"I urge all parties to exercise very, very strong verbal discipline. I think the less we talk about this the better," said Draghi.

Some eurozone countries, notably France, have expressed concern that the level of the euro, which has risen recently on the foreign exchange markets, could hurt exports and dampen any nascent recovery in the eurozone.

Paris wants the eurozone to arm itself with an exchange rate policy. The external value of the euro should not be left to market forces, French President Francois Hollande has argued.

But Draghi hit back saying: "The exchange rate is not a policy target, but it is important for growth and price stability."

He also denied that the euro was too strong, saying it was "around its long term average."

On the economy, the ECB chief said: "We enter 2013 in a more stable financial environment than in recent years" and predicted "a very gradual recovery" later in the year as the 17-nation eurozone battles with recession.

He acknowledged that austerity in many countries was strangling economic growth but insisted it was "unavoidable" for nations, especially those labouring under high debt, to reduce their public deficits.

He called for "properly designed fiscal consolidation as based more on expenditure cuts rather than on tax rises", noting that taxes in the eurozone were "indeed very high already."

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    AUDGBP=X
    0.6753-0.0003-0.05%
    AUDEUR=X
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