Following the diagnosis of the health crisis, central banks’ response was the same worldwide, synonymous with a global pandemic. Their decisions aimed to achieve three objectives: provide the necessary liquidity, combat market volatility, and establish the conditions to boost demand after the collapse of supply due to the lockdown. Private banks are proving essential in achieving these objectives quickly and effectively, as the urgent situation demands.
The European Central Bank (ECB) estimates that the exceptional monetary measures implemented will have a positive impact of 1.3 percentage points on growth and 0.8 points on inflation. The combined injection of liquidity and asset purchases is benefiting families and businesses through banks, which act as a transmission belt for monetary policy. If the asset purchase figure is extrapolated, the ECB could hold 27% of the eurozone’s public debt next year, undoubtedly a decisive factor in combating the risk of market fragmentation. Conversely, the European monetary authority kept official interest rates unchanged, given the possibility that a further decrease could exacerbate risks to financial stability and that its effectiveness might be questioned at current negative levels.
Globally, central bank balance sheets are estimated to have increased by $6 trillion, a crucial volume for improving financial conditions and supporting financial asset prices. However, the IMF warns in its latest Global Financial Stability Report that these market interventions may explain the decoupling between their evolution and that of the real economy. Furthermore, they may also exacerbate pre-pandemic vulnerabilities such as high public debt and price excesses in some financial assets. Financial markets thrive on expectations, although expansive monetary measures can generate distortions in investors’ risk perception and resource allocation.
Central banks have taken appropriate measures at the right time. They must now be persistent in the path undertaken, while adapting it to economic developments, inflation, and unwanted financial risks. Preserving financial stability in the medium and long term is a necessary condition for maintaining solid and stable growth over time.
José Luis Martínez Campuzano, Spokesperson for the Spanish Banking Association
