Central banks will struggle to raise rates from zero: ECB's Praet

ZURICH (Reuters) - Central banks around the globe may struggle to raise interest rates because economies have got too used to ultra-low rates, the European Central Bank's chief economist, Peter Praet, said on Thursday.

The euro area was far from interest rate normalization, a problem because that in itself raised significant stability risk, Praet said.

"When the monetary policy tightening cycle eventually commences, it is very likely to be different and more challenging than in previous cycles," Praet told a conference. "Zero has featured for longer than any other value of the policy rate before."

"The economy may have just gotten too used to that number," he added.

The U.S. Federal Reserve skipped a chance to hike rates this month, arguing that it needed to put off its first increase in nearly a decade due to emerging market turmoil.

The ECB has cut rates to their lower bounds and has been buying 60 billion euros ($67.5 billion) worth of assets a month to kick start inflation and growth.

"Maintaining a very accommodative policy stance for too long certainly carries significant risks," Praet said. "Incentives for timely balance sheet repair may be undermined and new imbalances may ultimately emerge."

Still, the ECB had to remain true to its mandate to raise inflation back to nearly 2 percent from around zero now, Praet said.

Praet said asset purchases, known as quantitative easing, were in general effective but banks needed better studies to determine if such schemes should remain a central banking tool.

"But it is fair to say that we need to understand more about their transmission in order to see whether QE can be retained as an instrument that, if not conventional, can play a valuable and reliable role in the toolbox to which central banks can make recourse," he said.

(Reporting by Joshua Franklin; Writing by Balazs Koranyi; Editing by Larry King)

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