Zero interest rates and liquidity injections

- "Central banks are keeping key intervention rates very low and continuing to buy assets by injecting liquidity."
- "There are two clashing views about the central banks’ stance on this issue:
• a positive view: this policy facilitates the balance sheet restructuring of private economic agents (deleveraging, sales of risky assets, raising capital, etc.), and therefore the return to a normal financial situation;
• a negative view: this policy artificially keeps alive borrowers that in reality are insolvent - and which will become insolvent again as soon as monetary policies are normalised. Moreover, it leads to continued inefficient investments."
- "It is difficult to decide which view is right, as the two types of situation can be seen:
• actual improvement in the balance sheets of companies, households and some countries (Greece, Ireland, etc.); bank provisioning and recapitalisation;
• insolvency situation for some banks, masked by monetary policy (particularly in Spain and the United States). Moreover, the whole banking sector - and perhaps also some countries (United Kingdom) - benefit from the slope of the yield curve; accumulation of bonds at abnormally low interest rates by banks and institutional investors."

Natixis Flash Economics 375 20100722

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