Liquidity policy may need to be more active to contribute to the functioning of the money market, which exacerbates the scope for misunderstanding about monetary policy intentions. In the absence of a clear distinction, the danger exists that monetary policy and liquidity come to be seen as substitutes for one another, rather than having the latter subordinated to the former.
Necessary monetary policy decisions may therefore be delayed if liquidity policy is seen as an adequate palliative. Alternatively, monetary policy may be distracted from its medium-term objective of price stability if it is seen as a mechanism to support market functioning.