Policymakers are warned to prepare for a bumpy exit from the pandemic.
nytimes.com
Gas prices are on the rise in the United States. One of the biggest challenges facing policymakers is how they might respond to a persistent rise in inflation.Credit...David Zalubowski/Associated Press
The global economy is entering a new stage of the recovery from the pandemic, in which policymakers must prepare for “different but no less formidable challenges,” the Bank of International Settlements said on Tuesday.
In its annual economic report, the organization, whose 63 members include the world’s largest central banks, warned that the recovery had so far been “incomplete and uneven” as emerging market economies (aside from China) have lagged behind, the euro area is trailing its peers, and the services sector is recovering more slowly.
“While the recovery has been faster and stronger than anyone would have imagined a year ago, we are not out of the woods yet,” Agustín Carstens, the group's general manager, said.
Monetary policy by central banks and fiscal policy by governments need to remain supportive but also be flexible, the report said. One of the biggest challenges facing policymakers is how they might respond to a persistent rise in inflation. Though many, including officials at the Federal Reserve, say they strongly believe that the current increase in prices is temporary, traders and investors are wary of being caught out by a sudden change in this stance that leads to higher interest rates or the end of bond-buying programs.
The bank’s report contemplates three paths for the recovery, including one in which inflation exceeds expectations because of fiscal stimulus, particularly in the United States, and consumers spend more of their savings than anticipated. Higher-than-expected inflation would “severely” test central banks, which would find it difficult to avoid market volatility, the report said.
But even if the rise in inflation is temporary, “financial market participants could overreact,” the report said. This could lead to disruption in markets because there has been a long period of “aggressive risk taking.”
The collapse of the New York hedge fund Archegos Capital Management, which was forced to sell off billions of dollars in equities in March after it could not meet the demands of several banks, costing the banks several billions in losses, “could turn out to be the proverbial canary in the coal mine,” the report said. The fund’s failure raises a question about resilience of nonbank financial firms and how much hidden exposure they have.
When the pandemic ends, it will leave “issues that may well be more daunting and enduring,” the report said. One of those will be the need to normalize policy so that central banks and governments have “safety margins” to fight the next crises.
“An economy that operates with thin safety margins is vulnerable to both unexpected events and future recessions, which will inevitably come,” the report said.
— Eshe Nelson |
