By Tom Fairless and Todd Buell
European Central Bank President Mario Draghi issued a blunt warning over the risks that low interest rates pose to the eurozone's EUR10 trillion ($10.6 trillion) economy -- just as the ECB prepares to decide whether to hold rates down for longer.
The warning underlines the dearth of policy choices central banks face as they seek to further stimulate their economies after years of aggressive easy-money policies.
Speaking at the European Parliament in Brussels on Monday, Mr. Draghi said a lengthy period of low rates had created "fertile terrain" for financial-market risks, including a buildup of debt and excessive risk-taking.
In an unusual move, theECB chief also flagged "significant vulnerabilities" in eight European real-estate markets, as a result of rising debt levels or excessive valuations. He urged governments to take action to tackle those risks.
The ECB has launched repeated waves of stimulus over the past two years, pushing interest rates below zero and buying more than EUR1.3 trillion of government and corporate debt in an effort to bolster the region's lackluster economy.
While those policies have helped to drive down borrowing rates across the 19-country eurozone, supporting lending and growth, they have triggered side effects, including a surge in the prices of stocks, bonds, real estate and other assets.
ECB officials are expected to decide on Dec. 8 whether to extend their EUR80 billion-a-month bond-purchase program, known as quantitative easing. With growth and inflation still weak, most economists expect an extension of at least another six months.Mr. Draghi's remarks laid bare the risks of such a move.
The European Systemic Risk Board, a risk-monitoring body chaired by Mr. Draghi, on Monday published warnings it had sent to eight European finance ministers, highlighting vulnerabilities in their residential real-estate markets. The concerns relate to potential price bubbles, rising debt levels and the ability of households to repay their mortgage debt.
It is the first time the ESRB has issued a public warning since it was set up in 2010 in response to the eurozone's financial crisis, an ECB spokesman said. The countries involved are Austria, Belgium, Denmark, Finland, Luxembourg, the Netherlands, Sweden and the U.K.
While those property markets posed no immediate danger for the region's financial system, Mr. Draghi warned that an economic shock could quickly lead to loan defaults and price falls.
Still, he stressed that the ECB's stimulus policies have been a keyingredient in the region's economic recovery, and indicated they were likely to continue.
"Right now, the greatest risk comes from impaired growth, from the possibility our recovery doesn't firm and growth stalls," Mr. Draghi said.
But the ECB chief also repeated his plea for governments to do more.
Central banks "cannot generate sustainable and balanced growth on [their] own," Mr. Draghi said, urging national authorities to swiftly address low productivity growth and banking-sector problems.
Mr. Draghi also gave his home country, Italy, a vote of confidence ahead of a critical constitutional referendum taking place on Dec. 4. Italian debt "is sustainable," he said, noting that the country's borrowing costs had fallen in recent years and that growth in the country was gradually recovering.
--William Wilkes contributed to this article.
Write to Tom Fairless at email@example.com and Todd Buell at firstname.lastname@example.org
(END) Dow Jones Newswires
November 28, 2016 18:14 ET (23:14 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.