Central banks cannot go it alone

Coordination and co-operation needed more than ever

Now more than ever, coordination and co-operation are needed to weather the pandemic’s economic and financial headwinds.

The Covid-19 crisis is unprecedented. Policy-makers and pundits agree that the pandemic will have large adverse economic and financial consequences. Global economic activity has already contracted; in February the JP Morgan global all-industry index fell to 46.1 from 52.2 the previous month, its lowest level since 2009. Likewise, global equities have been infected as world indices plunge.

The International Monetary Fund expects the pandemic to trigger a recession in 2020 that could be worse that the one triggered by the 2008 crisis. On a more positive note, the impact would be transitory and a quick recovery can be expected in 2021, conditional on the successful containment of the outbreak.

During the 2008 financial crisis, central banks were the ‘only game in town,’ lowering interest rates aggressively and resorting to non-conventional monetary tools such as quantitative easing to help contain systemic risks and successfully avert a global financial meltdown.

Following this experience, notions on central banks’ economic role became highly inflated. Central banks are now expected to undertake responsibilities that fall outside the ambit of traditional monetary policy. At present, they are actively involved in policy dialogues on inequality, climate change and fiscal sustainability. While central banks can contribute productively in addressing these issues, taking on broader public policy goals could potentially overburden monetary policy and hinder their ability to steer the economy through another crisis.

Quarantine or isolation is necessary to contain the pandemic, but the exact opposite is needed to counter its adverse economic and financial consequences – policy coordination.

Central banks were quick to react. Among the tools deployed were aggressive rate cuts, asset purchases, currency interventions and liquidity injections.

Though these measures are necessary to calm financial markets, they are not enough to steer economic growth back to recovery. First, prolonged monetary easing has left most major central banks with less ammunition and little room to manoeuvre. Second, monetary stimulus measures are only addressing a secondary shock, the financial repercussions of the primary shock to the real economy. Recovery from the public health crisis may take longer and its sustainability will require long-term measures like improved healthcare, education and training, and capacity building.

There is a need to tackle the crisis directly through determined fiscal stimulus. Governments must focus spending on improving healthcare systems and research a cure for the virus. Government injections are also needed to support firms and avoid disruptions in the supply of goods and services. On the demand side, cash handouts and expanded unemployment benefits can help affected workers and households by ensuring that they have continued means to purchase these goods and services. This can also help prevent social tension.

Central banks need to continue to provide the necessary ‘liquidity bazooka’ to ease credit conditions and provide ample liquidity in the system. These would calm markets and nudge banks to continue to provide lending to large and small firms.

Multilateral institutions like the IMF and World Bank can help by providing emergency finance and strengthening bilateral and multilateral surveillance on the pandemic and policy actions to temper its impact. The private sector can assist by continuing to provide employee salaries and benefits amid lockdowns to augment or provide household income and mitigate dissatisfaction.

In the fight against this crisis, everyone has a role to play.

Amando Tetangco, Jr. is the former governor of the Bangko Sentral ng Pilipinas.

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