Monetary and Financial stability during Coronavirus burst
The impact of Coronavirus is having a serious impact on the global economy and has sent Policymakers looking for ways to respond success in containing the virus comes at the price of slowing economic activity, does not matter whether social distancing and reduced mobility are voluntary or enforced. Such an abrupt rise in uncertainty can put both economic growth financial stability at risk. In addition to targeted economic policies and fiscal measures the right monetary and financial stability policies will be vital source of support and defense the Global economy.
Equity market volatility increased sharply in countries around the world. Stock markets in major economies such as in USA, Euro area and Japan, all fell sharply and witnessed a spurt in implied volatility as nervous and restive investors tried to factor in latest risks posed by new virus. As a result sharp increase of uncertainty, credit spreads have widened broadly across markets and investors are reallocating from risks to safer assets. High yield and emerging - market bonds are hit particularly hard by the reallocation. Companies are facing higher funding costs when they tap Equity and Bond markets. Firms postpone investment decisions and due to individuals delay consumption as they feel less financially secure.
The tight financial conditions along with expectations of low inflation means that Monetary policy has a role to play at the current juncture. Central banks can help to ease the tightening of financial conditions by putting in Liquidity and cutting interest rates thereby preventing a possible credit crunch. In fact, markets have been expecting aggressive easing by Central banks as reflected in
sharp fall in Bond yields in many countries around the world.
The sharp decline in interest rates, combined with growing anxiety about the economic outlook,
have also raised Investor concerns about health of Banks. Bank's share prices have fallen sharply,
as also Bond prices come under pressure likely reflecting fear of potential losses. Given the temporary nature of virus outbreak, Banks could consider temporary restructuring of loan terms
for the most affected borrowers. Supervisors should work closely to ensure that such actions are transparent and temporary. The goal must be to preserve Bank's financial strength and overall transparency across the financial sector. This requires an increased focus on Asset Managers and Exchange - Traded funds, where investors might liquidate risky investments suddenly.
The Policymakers must act decisively and co-operate at the Global level to preserve monetary and financial stability during his time of emergency.
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Equity market volatility increased sharply in countries around the world. Stock markets in major economies such as in USA, Euro area and Japan, all fell sharply and witnessed a spurt in implied volatility as nervous and restive investors tried to factor in latest risks posed by new virus. As a result sharp increase of uncertainty, credit spreads have widened broadly across markets and investors are reallocating from risks to safer assets. High yield and emerging - market bonds are hit particularly hard by the reallocation. Companies are facing higher funding costs when they tap Equity and Bond markets. Firms postpone investment decisions and due to individuals delay consumption as they feel less financially secure.
The tight financial conditions along with expectations of low inflation means that Monetary policy has a role to play at the current juncture. Central banks can help to ease the tightening of financial conditions by putting in Liquidity and cutting interest rates thereby preventing a possible credit crunch. In fact, markets have been expecting aggressive easing by Central banks as reflected in
sharp fall in Bond yields in many countries around the world.
The sharp decline in interest rates, combined with growing anxiety about the economic outlook,
have also raised Investor concerns about health of Banks. Bank's share prices have fallen sharply,
as also Bond prices come under pressure likely reflecting fear of potential losses. Given the temporary nature of virus outbreak, Banks could consider temporary restructuring of loan terms
for the most affected borrowers. Supervisors should work closely to ensure that such actions are transparent and temporary. The goal must be to preserve Bank's financial strength and overall transparency across the financial sector. This requires an increased focus on Asset Managers and Exchange - Traded funds, where investors might liquidate risky investments suddenly.
The Policymakers must act decisively and co-operate at the Global level to preserve monetary and financial stability during his time of emergency.
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