Post-COVID-19 recovery | Loose monetary policies pose a challenge: IMF

The pandemic-induced lockdowns disrupted the revenue streams of businesses around the world

The International Monetary Fund (IMF) has warned that ‘highly expansionary monetary policy’ executed by central banks around the world to ease pandemic crisis may pose a challenge to policymakers post COVID-19 recovery.

The fund noted that in order to maintain the flow of credit to households and firms and thus support aggregate demand, the central banks continued with loose policies. Liquidity needs by firms and households have been met by additional debt, which has for the time being cushioned the devastating effects of the pandemic crisis.

In the later Global Financial Recovery, the IMF estimated a likely tradeoff for policymakers.

“Accommodative policy boosts short-term activity but at the cost of a potentially greater downside risk to growth in the medium term as a result of increased non-financial sector leverage,” the report said.

It suggested mitigating the trade-off through macroprudential tools. The report said that tightening measures targeted at the eligibility of borrowers or at liquidity-related limits on banks are associated with slower buildups in leverage of either households or nonfinancial firms.

“Measures aimed at curbing foreign currency exposures of banks are effective at reining in buildups of nonfinancial corporate leverage in emerging markets. Tightening macroprudential measures can also improve the intertemporal trade-off, reducing downside risk in the medium term and mitigating the effects of loosening financial conditions.”

The pandemic-induced lockdowns disrupted the revenue streams of businesses around the world, which led to an increase in leverage in corporate balance sheets and households.

“Policymakers, therefore, need to stay attuned to the emerging financial stability risks as the post-pandemic recovery takes hold,” the report said.