After responding forcefully to the Covid-19 pandemic, policymakers have their work cut out for them as they try to prevent long-term economic damage, a report from the Financial Stability Board says.
Governments, central bankers and regulators unleashed an array of supports to help businesses and households weather the negative effects of strict curbs on economic activity due to public health restrictions.
While that response was largely regarded as a success, global policy challenges have become more complex, including the puzzle of exiting pandemic supports.
According to the FSB’s report, economic and financial market developments over the past few months have reinforced the challenges facing policymakers, including the risk of problems that were papered over by pandemic supports revealing themselves as those supports are withdrawn.
These difficulties also include the “need for sustained policy support” amid high inflation and tighter monetary policy, and the threat of negative cross-border spillovers due to a divergence in monetary and fiscal policy approaches.
The paper recommends that policymakers consider how to address debt overhangs that arose during the pandemic, containing cross-border effects, and regaining domestic policy space.
For its part, the FSB said it will “continue to support a strong and equitable global recovery” through monitoring vulnerabilities in the global financial system, facilitating information sharing about the effects of prudential policy measures, and its continued work to strengthen the shadow banking sector.