UBS’s Sergio Ermotti sat down for interviews with the financial press on Tuesday after the bank reported its best quarter in nine years.
During lengthy comments on the state of the banking industry and the outlook for markets amid a global dovish pivot from policymakers, Ermotti sounded a highly skeptical tone about the efficacy of more monetary accommodation.
Asked by Bloomberg whether central banks are blowing bubbles, Ermotti said this:
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Got that? He’d “be very, very careful about growing further the balance sheet of central banks [because] we are at a risk of creating an asset bubble”. Obviously, both equities and bonds have surged this year on stimulus bets.
Of course, the other thing “we are at a risk” of doing is further pinching net interest income for banks, which is something UBS is concerned about. “A sharp drop in interest rates and expected rate cuts will continue to adversely affect net interest income compared with last year”, the bank said in a statement on Tuesday, alongside its quarterly results.
“We have to now assume that rates will stay lower for a longer period than expected. That’s the reason why we are very focused on mitigating actions”, Ermotti told Bloomberg.
During broadly similar remarks to CNBC, Ermotti said it’s not all about the banks. “If the collateral damage of negative rates would be only the banking system, one could probably try to live with that”, he said.
He continued: “But as you can see, the psychological effect on consumers and the side effects [are] very high”.
Ermotti also weighed in on whether blockbuster cross-asset returns in 2019 (predicated primarily on the global central bank pivot) have already taken us into bubble territory. “Asset prices went up, but it’s not really correlated with investor sentiment”, he said during his sit-down with Bloomberg.
For reference, here’s a snapshot of global cross-asset performance YTD:
As far as the outlook for US monetary policy, Ermotti says he hopes the Fed has learned something from the Japanese and European experiments with negative rates.
“It’s something that’s very difficult to get out from and the collateral damages are very high”, he chided. “I hope the US won’t follow that”.