As policymakers try to support the real economy and protect the banking system, they’re unwittingly conducting a war on market liquidity. We think this approach ensures they won’t achieve either of their stated goals.
The Bank of Japan (BoJ) recently joined Denmark’s Nationalbank, the Swiss National Bank, the European Central Bank (ECB) and Sweden’s Riksbank in adding negative interest rates to the offensive—with the ECB moving more negative again last week. This is a major escalation with dangerous consequences.
In order to successfully support sustainable growth and a sound banking system, policymakers must do a better job of coordinating their regulatory and monetary policies, or they risk creating their own serious crisis.