Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset

Strategy from Morgan Stanley. Along with my colleagues bring you a variety of

perspectives, I'll be talking about trends across the global investment

landscape and how we put those

different ideas together.

It's Friday, September 13th at 2 p.m. in London.

The European Central Bank lowered its target interest rate yesterday and the Federal Reserve

is expected to do the same next week.

Indeed the debate in financial markets isn't about whether Central Banks will lower rates but how much more they will do so.

Those expectations are driven by a variety of factors, but one rationale, which is my focus today, could be characterized as simply, why not? Lower interest rates reduce the cost to anybody who borrows, including homeowners, businesses, and governments.

Three pretty powerful constituencies.

Quantitative easing, when Central Banks buy bonds directly in the market, has the same effect.

The case against lower rates has historically been that too much cheap money would cause excessive

speculation and price inflation.

But on the latter, low rates so far seem relatively consequence free, with global inflation still low despite borrowing costs at

multi-generational lows.

What I want to focus on, however, is the idea that lower rates do have drawbacks.

This is important in thinking about what Central Banks might do and what sort

of actions actually qualify as a positive surprise. The first drawback is that while low rates and

quantitative easing are supposed to encourage lending and

financial activity rates that are too low can hurt the business models of

banks and insurance companies reducing financial activity. Because low rates make it

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