BIS Media Briefing 29 June 2020 - Annual Economic Report 2020

Agustín Carstens, General Manager; Luiz Pereira da Silva, Deputy General Manager; Claudio Borio, Head of the Monetary and Economic Department; and Hyun Song Shin, Economic Adviser and Head of Research

Carstens, Pereira, Borio and Shin brief the media on the main messages of the BIS's Annual Economic Report for 2020.


Agustín Carstens: 

Thank you for joining us this afternoon to discuss this year's Annual Economic Report and Annual Report, our 90th.

The shock of the Covid-19 pandemic has turned out to be a defining moment. The containment measures are inflicting an enormous global economic blow, and the long-term effects will be profound.

The global sudden stop in economic activity makes this crisis unique. The worldwide lockdowns have crippled both supply and demand, crushing the production and exchange of goods and services.

Central banks have done their utmost to deliver within their mandates, as we discuss in the Report. As lenders of last resort, they have reacted promptly to stabilise markets. By providing monetary accommodation, even further expanding their toolkit, central banks have sought to support financial stability and supplied oxygen to the global economy, preserving firms and saving jobs.  Notably they have coordinated effectively with fiscal authorities to cushion the blow.

Nimbleness, boldness and decisiveness were called for. And central banks delivered. However, it has been quite challenging, given the limited policy space available before the pandemic and the build-up of underlying vulnerabilities, particularly in the non-bank financial sector.

Central banks have succeeded in many of their aims. Markets have stabilised and businesses have started issuing debt again. Even so, many challenges lie ahead.

We have only just overcome the liquidity phase of the crisis in countries that are now relaxing restrictions. In many others, the health crisis is still acute. And the epidemic could flare up again anywhere.

Financial markets may have become too complacent - given that we are still at an early stage of the crisis and its fallout.

The economic outlook is still highly uncertain.

Importantly, the shock to solvency is still to be fully felt. Business insolvencies and personal hardship may well increase.

In the solvency stage, the heavy lifting is expected to come from fiscal authorities.

Risks are especially high for emerging market and developing economies, which experienced a triple sudden stop: in domestic economic activity, in capital flows and, for several, in commodity exports and remittances.

Central banks face many questions and trade-offs. Let me mention four.

First, central banks have been forced to navigate within what is, in normal times, private sector territory.

This brings economic and political risks to the fore. For example, there may be painful but necessary downsizing in some sectors. What is the best way to differentiate between viable and non-viable firms?

Second, interactions between monetary and fiscal policies have become even more prominent.

In their crisis reponse, central banks smoothed the path for government financing. However, this should only be a temporary expedient. And it should only be tried by central banks with a credible record of adhering to inflation mandates. These types of policy are only possible because of the credibility that monetary policymakers have built up over the years.

When crisis management gives way to ensuring price stability, it will be critical that central banks remain independent and act without hesitation to fulfil their mandates.

Third, as soon as circumstances allow, central banks need to regain monetary policy space.

Eventually inflation will come back. As the recovery takes hold and the pricing power of firms and labour increases, upward price pressures will emerge. Staying ahead of the curve will be essential.

Finally, central banks need to continue to underpin financial stability.

As regulators and supervisors, they must balance the use of buffers and the need to support the economy, with financial stability.

Central banks also have to revisit the size and design of their financial systems. They strengthened the banks post-GFC; now they need to help ensure that the non-bank financial sector optimally supports the real economy over the medium term.

Bottom line. The global economy seems to be recovering, much remains to be done. The virus is far from defeated, and many countries, especially those with weaker defences, are still in the early phase of the struggle. The next tasks will be to address solvency, prepare for the recovery, and adjust the economy to the post-pandemic world.

Central banks are fully aware of the challenges ahead. Some of these challenges extend beyond their mandate. Monetary policy alone cannot deliver higher sustainable economic growth in the context of price and financial stability. Growth-friendly fiscal policies and structural reforms are still urgently needed.

I'm happy to take your questions.

[Q&A session to come]

Related information