In particular, such a situation has the potential to increasingly over time distort market participants’ perception of risks, such as liquidity and interest rate risk. A renewed under-pricing of such risks could again lead to misallocation of resources and to asset price bubbles. The period immediately preceding the start of the financial turmoil in August 2007 is a case in point.
New financial fragilities may emerge which, in turn, may hamper the normalisation of rates. Finally, maintaining interest rates very low for too long may reduce activity in money markets, delay necessary balance sheet  4  BIS central bankers’ speeches  adjustments by firms and households, set disincentives to governments for their efforts to consolidate public finances.