Central Banks after COVID

The main, near-term concern for central banks is to balance the need to support post-pandemic recoveries against the risk of a pick-up in inflation as the vast policy stimulus feeds through. Looking further ahead, central banks face additional challenges from possible changes to their mandates and the advent of central bank digital currencies. In addition, the high level of government debt will raise some interesting questions about the interaction of fiscal and monetary policy.  

Our view

  • Vaccines and associated economic recoveries will not cause central banks to tighten policy. There is still significant spare capacity in most economies and monetary policy support will be needed all the more as fiscal support expires.
  • The huge policy stimulus is more likely to fuel asset price, than consumer price, inflation. In any case, central banks will be more tolerant of consumer price inflation. So monetary policy will remain looser than expected in most DMs and EMs too. We don’t think that central banks need to rush to shrink their balance sheets.
  • Green agendas and inclusive employment goals are likely to rise in prominence in central banks’ mandates. In most cases, though, governments are much better-placed than governments to achieve these wider goals.
  • Central banks may find themselves under pressure to keep interest rates low in order to help governments finance their debt. Accordingly, so-called “financial repression” will become more widespread.
  • Meanwhile, central bank digital currencies are likely to be introduced over the coming decade. This will present central banks with fresh challenges over how such currencies interact with monetary and fiscal policy.

Top reads