(CEP News) Frankfurt - The European Central Bank’s key policy rate is “close” to its lower limit and should not fall too low, ECB Governing Council member Ewald Nowotny said.

“We are close to the limits of interest-rate policy,” Nowotny said during an event in Salzburg, Austria on Monday. “My personal feeling is that we shouldn’t go below 1 percent with the refinancing rate, but that’s a discussion we’ll have in May.”

Nowotny’s comments are in line with those made by his colleagues, including ECB member Lorenzo Bini Smaghi, who warned about bringing rates down too low. ECB member Axel Weber also argued against rates falling below 1%.

Speaking at an event in Hamburg on Wednesday, Weber said that in an environment of very low interest rates, banks would have less incentive to lend to one another and consequently credit markets could become “completely paralyzed”.

However, ECB members are also considering other, non-standard options to help restore growth, including asset purchases to counteract possible deflation risks. Nowotny called such purchases “sensible”. However, they also pose problems, he said.

“One of the problems we have in the euro zone is that [the monetary union is] still not a fully integrated homogenous capital market,” Nowotny said. “The corporate bond market in each country is quite different and in some countries doesn’t exist at all. This is a problem but it doesn’t mean we can’t solve it.”

Nowotny also said the latest economic forecasts for the euro zone are worse than what the ECB had projected and that “nobody knows” when the economy will reach a bottom.

Written by CEP News European Staff, eunews@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca

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Posted in Categories: Economy, Eurozone, Releases.

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