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Bundesbank's Dombret warns on bubble from low rates

Matt Clinch; Reporting by Annette Weisbach
Low interest environment could lead to bubbles: Bundesbank

Record low interest rates from central banks could lead to dangerous asset bubbles, Andreas Dombret, a member of the executive board of the Deutsche Bundesbank told CNBC.

Since the financial crisis of 2008, central banks around the globe have opted to reduce benchmark interest rates in order to stimulate cash flow into the real economy. While many doubt whether these measures have yet to be felt in the real economy, with more businesses and households spending, Dombret believes that this expansionary monetary policy would cause problems if it goes on for too long.

"If we were to continue this very low interest environment over a long period of time. Experience in other countries has shown that this may well lead to bubbles," he told CNBC Friday. "We have never had a real real estate bubble in Germany, so we don't really have that experience with real estate bubbles. This is why we are watching this very closely."

(Read More: German banks will pass stress tests, says regulator)

Dombret sees several key areas where these low rates have already been felt in the German economy. Banks have been affected by low rates, he said, as well as insurance companies that have searched for yield in a difficult environment. He added that property prices have surged in Germany's seven largest cities by 9 percent this year as investors opt for better-yielding assets than cash and bonds.

The European Central Bank (ECB) cut its main refinancing rate last Thursday by another 25 basis points after inflation figures surprised on the downside. Media reports showed that about one quarter of the 23-member Governing Council opposed the move with Jens Weidmann, the president of the Bundesbank, believed to have been among them.

Officals in Germany may be reluctant for more dovish moves for the ECB, but Dombret conceded that its policies have been beneficial. It has allowed peripheral countries such as Spain, Italy and Greece - those euro zone members ravaged by a sovereign debt crisis that set in after the global financial crash - to have more time to adjust and rebalance their economies, he said.

(Read More: German house prices could be overvalued by 20%: Bundesbank)

"We do need this help...the periphery are making progress," he said. "We are on the right track if we continue what we are doing right now."

Dombret added that these tough austerity reforms by struggling euro zone nations could start to weigh on their economies. He said that "reform fatigue" would be "very, very bad" and "very, very dangerous".

(Read More: ECB Cannot Solve Euro Zone Crisis, Says Bundesbank Chief)

On Thursday, Jeroen Dijsselbloem,head of the meeting of the 17 euro finance ministers known as the Eurogroup, said Greece must urgently meet key commitments it has made to its international creditors in order to unlock its next tranche of aid, which is needed to meet its funding needs next year.

This was met with a firm response by Greek officials with Finance Minister Yannis Stournaras saying that Greece will not yield to pressure to impose further austerity measures.

By's Matt Clinch. Follow him on Twitter .