Beyond its impact on bank profitability, a prolonged period of low interest rates may also induce investors in search of yield to take on undue risks that could sow the seeds of financial imbalances. Eventually, this could undercut the central bank’s ability to maintain price stability. Clearly, the first line of defence against financial imbalances should be macroprudential policy.
But this policy approach is still in its infancy, and our knowledge about the effects and transmission channels is incomplete.