Rising asset prices are a major challenge for central banks and policymakers have yet to find the right answer, European Central Bank chief economist Otmar Issing said today.
The ECB increasingly has stressed that an important reason why it is raising interest rates is that euro zone borrowing costs are very low, and that such cheap money can drive up asset prices and cause inflationary pressures down the road.
The ECB has said there are times when it should "lean against the wind" to avert a mess in the first place, a view Mr Issing favours given his attention to inflationary dangers from money and credit growth.
But he acknowledged the difficulty. "Asset price rises are one of the major challenges of a central bank ... we're far from finding answers," Mr Issing said in a question-and-answer session after delivering a speech at the Bank of Finland on monetary union.
House prices in the euro zone may be overvalued, with Spain the biggest cause for concern, according to the ECB's February bulletin. Prices rose 7.7 per cent on an annual basis in the first six months of last year compared with average growth of 3.8 per cent from 1997-2000, the study said.
Inflation in the much smaller Irish property is currently running at an annual rate of 11 per cent according to the latest permanent TSB house price index.
Central bankers are also trying to understand the reason for very low bond yields even though central banks including the Fed have been raising official interest rates.
Former Fed chairman Alan Greenspan dubbed this a "conundrum" while his successor Ben Bernanke has said it may reflect either lower risk premia or a savings glut.
The ECB has raised rates twice since December to 2.5 per cent. Markets see a 50 per cent chance of a 0.25 percentage-point hike to 2.75 per cent at its May meeting, with rates likely to hit 3 per cent by the end of the year, against a backdrop of firming growth and high levels of liquidity.