The withdrawal of monetary stimuli would be the next big challenge

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(Bloomberg) – Central banks and governments were quick to prop up the global economy when the covid-19 pandemic broke out. Now, a greater challenge will be to eliminate the unprecedented support they have deployed, according to the Bank for International Settlements.

As economies recover, monetary authorities will need to enact more targeted fiscal measures to preserve political space, the Basel-based institution said in a report released Tuesday titled “Central banks face challenges from Pandexit.” .

In light of the pick-up in consumer price pressures, which are likely to be temporary, monetary policymakers will also need to strike a balance between assuring markets that they are willing to support growth and showing that they are prepared to fight. against inflation.

“Monetary policy must be flexible and prudent,” said Agustín Carstens, director general of the BIS and former governor of the Bank of Mexico, in a transcript of the speech that accompanied the report. “Accommodative policies are still needed, although the recovery could be quick. Careful communication will be essential to make the journey easier. “

Central banks around the world are beginning to control the largesse of the past 16 months as the recovery takes hold, albeit unevenly. The Federal Reserve is gradually approaching the time when it will cut support, while its counterparts in the UK, Canada, Norway, Sweden, South Korea and New Zealand are among the countries charting a course towards a reduction in stimulus. . Mexico, Hungary and the Czech Republic raised interest rates last week, after in 2021 they had already been raised by Brazil, Turkey and Russia.

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With a track record of urging policymakers to curb high asset prices, the BIS noted that house prices had risen more steeply during the pandemic than fundamentals would suggest, increasing the sector’s vulnerability. if borrowing costs increase.

The BIS, a forum for central banks, highlighted other challenges, both short-term and long-term, including the risk of increased corporate insolvencies and the need for regulators to ensure that banks continue to lend to companies without assuming too risky.

Changes in demand patterns, as more people choose to work from home permanently, as well as adjusting the orientation of policies so that investors are not focused only on day-to-day events, will present new challenges. said the BIS.

To prepare for future crises, officials will eventually need to restore their room for maneuver, both in fiscal and monetary policy. Increasing pressure on central banks to keep interest rates low to help governments manage their strained finances may complicate that task, according to the BIS.

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