Banks may therefore have less incentive to monitor credit risk properly and may provide too many loans to non-profitable business. Over time, such misallocation of financial resources would undermine overall productivity and depress growth and employment. The third challenge is that protracted monetary accommodation may fuel bubbles in house prices and other asset markets. As the crisis has painfully demonstrated, the bursting of such bubbles inflicts large costs for the real economy. In this context, a natural question is whether monetary policy should be used actively to contain asset price booms and bubbles – a response known as “leaning against the wind”. Thanks to our monetary policy strategy, implicitly we do this to some extent. We focus on the medium-term horizon and take account of monetary developments in assessing risks to price stability. Having said that, let us be clear that changes in policy interest rates are normally not the first best instrument for addressing financial imbalances. They should be considered only under very special circumstances, for example when a widespread rise in asset prices threatens price stability in the euro area as a whole. In the absence of such imbalances relevant from a euro area perspective, the appropriate tools to counter imbalances in the financial sector and possible asset price misalignments are at the country level. To avoid the build-up of excessive risks in the financial system or housing markets, national authorities have appropriate tax and supervisory instruments at their disposal.
The interest rate in the overnight interbank market is now even lower, close to zero. Second, we have acted to prevent an abrupt reduction in the supply of credit to the real economy. We have given banks unrestricted access to central bank funding in all our refinancing operations. We have extended significantly the average maturity of these operations. We have broadened the set of eligible collateral. This assurance of funding to banks has prevented disorderly deleveraging in the financial sector and averted a collapse in money and credit, with potentially severe implications for price stability, and thereby employment and growth. All these decisions have ensured price stability and stabilised inflation expectations during an exceptional period. Naturally, the ECB is aware of the challenges arising from a protracted period of low policy rates and ample liquidity. Let me elaborate on the three main challenges. 2  BIS central bankers’ speeches  The first is that low interest rates may affect the ability of savers and investors to generate returns. This is especially the case for institutions targeting nominal returns, such as insurance companies and pension funds. Yet, by ensuring price stability throughout the crisis, monetary policy has contributed to more stable financial conditions. This is central to the interests of savers and investors: there can only be sustainable returns in a stable environment. The second challenge relates to incentives. A protracted period of low interest rates and ample liquidity facilitates rolling-over loans at very low costs.