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The Moral Hazard of Lower Interest Rates

With major central banks poised to cut interest rates in the not-too-distant future, regulators should start getting ahead of the foreseeable risks to financial markets and the real economy. At a time when asset prices are already elevated, lower borrowing costs will invite even more leverage and speculation.

LONDON – When interest rates decline and stabilize, financial-market participants tend to take on greater leverage and risk. The challenge for regulators, then, is to prevent those risks from becoming systemic and causing a broader economic crisis.