Supplying unlimited amounts of liquidity at interest rates close to zero has "unintended counterproductive consequences," former European Central Bank President Jean-Claude Trichet warned on Saturday.
"It's true that new bubbles are necessarily created when you deliver unlimited supply of liquidity at zero rates," Trichet told CNBC in an interview at the Ambrosetti Forum in Italy.
The European Central Bank (ECB) surprised investors and markets on Thursday by cutting interest rates to record lows and announcing a bond-buying program.
The rate on the main refinancing operations was cut to a new low of 0.05 percent. The rate on the marginal lending facility was lowered to 0.30 percent and the rate on the deposit facility was cut still further into negative territory, to -0.20 percent.
ECB President Mario Draghi also announced the ECB would purchase asset-backed securities (ABS) and covered bonds to boost the economy and boost inflation.
Trichet said he trusted the move to purchase ABS and said it was "very very important".
Under such a program, euro zone banks sell the ECB their loans and other types of credit that have been packaged together. Draghi said the ECB would only purchase less risky senior tranches of securitized debt and loans, as well as mezzanine tranches with guarantees.
"So I trust really,that as far as purchases of credible securities are concerned, the ECB is right to concentrate on where you have a problem, namely, the private tradable securities," Trichet said.
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"On top of that, of course you have the monetary policy decision, and historically very very low rates, which confirms that the is ECB taking very seriously this very low inflation which characterizes the euro area.
Concerns about growth-sapping low inflation had already seen the ECB unveil a host of measures designed to give the euro zone's recovery a boost in June.
Former European Central Bank executive board member Jörg Asmussen, now a minister in the German government, said the ECB was right to do whatever it could within its mandate. He said the bank should not "change the rules", echoing comments by other German policymakers who have challenged the legality of the ECB's as yet untested sovereign bond buying program.
Newswires, citing sources, reported that Bundesbank President Jens Weidmann had opposed the ECB's latest policy measures.
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Asmussen warned that the euro zone debt crisis was not over but "dormant".
"And the risk for catastrophic events have clearly diminished. But this is why I try to say on the fiscal policy side, it's extremely important – especially for countries with high public debt levels – to stick with the agreed framework."
He warned that structural reforms could not be replaced by monetary policy. "Monetary policy is not an all- purpose weapon to all kinds of economic problems."
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