Role of Monetary and Financial Stability Policy During the Coronavirus Outbreak

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The global spread of COVID-19 has been a life-changing moment for the whole world. From the loss of human life due to Coronavirus to the steep decline in the economy, the entire world has been through a lot in the past two years. As a result, there has been an abrupt rise to uncertainty about the economic outlook and associated downside risks. And, this abrupt rise in uncertainty has put economic growth and financial stability at risk. As a result, the world has seen a sharp fall in the major economies, such as the United States, the Euro area, and Japan. 

In addition, the world has also witnessed a gush in implied volatility of the stocks as nervous investors tried to factor in the latest risks created by the new virus. With the increase in the new uncertainty, the investors have started reallocating from relatively risky to safer assets. This relocation of investors from risky to safer investments has led to the widespread of emerging-and frontier-market bonds.

The uncertainty has led to the tightening of the finance, which has eventually led the companies to face higher funding costs when they turn towards equity and bond markets. In addition to this, even the individuals have started delaying their consumption due to financial insecurity, leading to the companies postponing their investment decisions or rethinking their already made decisions. But, to handle this uncertainty and instability of the economy, the government has taken various measures to help bolster the global economy. Some of the policies that can help bring economic stability globally are targeted economic policies, fiscal measures, right monetary and financial stability policies. Here we are going to know more about the monetary policy response and financial stability policies.

Monetary Policy Response

Monetary Policy, where the central banks regulate the money supply and credit availability through various means, has a major role in the current juncture of sharp tightening financial conditions and expectations of low inflation. And, preventing the current credit crunch prevailing in the world is possible only by the Central Bank if they inject liquidity and cut the interest rates. Moreover, bringing the world’s economy back to normal can only happen if synchronized action is taken across the countries, thus increasing the monetary policy. It makes monetary policy on top priority and ample liquidity within and across the borders the prerequisite for successfully bringing the world’s financial condition to a stable point. And, if the financial crisis pertains in the market for more duration, the Central Banks, along with the policymakers, have to switch to a broader toolkit to handle the crisis. 

Financial Stability Policies

The steep decline in the interest rates and an abrupt rise to uncertainty about the economic outlook have contributed to raising the concern among the investors about the bank’s health. In fact, there has been a sharp downfall of the bank’s share, and bond prices have also been affected by the current scenario, creating the fear of potential long-term loss. But, among all these fears of loss and insecurity, the only good news is that our banks have greater capital and liquidity cushions that make them much more resilient than the 2008 financial crisis. This news gives us the sense of relief that the weakening of financial stability from the bank sector is much lower even after the steady decline in share prices. 

But, despite all the stable conditions of the banks during the virus outbreak, a temporary reconstruction of the loan terms for adversely-affected borrowers should be considered. And, to give a transparent and temporary relief to the borrowers, it is important for the banks to let supervisors work closely with them. And, when the banks tend towards the borrowers for helping them in the crisis, it is also important to keep a keen eye on asset managers and exchange-traded funds. In addition, there have been a lot of cases where non-U.S. banks have borrowed in U.S. dollars. So, the banks need to increase the focus on exchange-traded funds because there’s a high chance for investors to liquidate the risky funds. And we all are aware of the fact that when there’s a large swing in asset prices, it can put the whole market and institutions under pressure. 

Thus, policymakers have to act carefully and wisely to preserve monetary and financial stability during the extraordinary crisis. The recovery of the world’s economy cannot be achieved from the Coronavirus without monetary and financial stability policies. And we at Central CRU are here to provide you with the correct information about the financial updates at every point in time and help you with all that we can. And if you want to know more about monetary policies and finance, visit our website Central CRU, and keep yourself updated.


Reference: 

Adrian, T.O.B.I.A.S. 2020. Monetary-and-financial-stability-during-the-coronavirus-outbreak/. [Online]. [2 December 2021]. Available from: https://blogs.imf.org/2020/03/11/monetary-and-financial-stability-during-the-coronavirus-outbreak/

Role of Monetary and Financial Stability Policy During the Coronavirus Outbreak
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