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Central banks
Opinion
Aidan Yao
Aidan Yao

Zero interest rates, heavy debt will be new normal in coronavirus recovery

  • The lessons learned from the 2008 global financial crisis suggest shutting off the liquidity tap could prove more challenging than opening it
  • Ultra-accommodative monetary policy is here to stay, with central banks also engaging in riskier asset purchases and even negative interest rates

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The headquarters of the People’s Bank of China in Beijing. Central banks across the globe have come under pressure to expand their balance sheets and pursue sometimes risky measures to help keep their economies afloat during the Covid-19 pandemic. Photo: Reuters
Aidan Yao
The Covid-19 pandemic has exposed several fault lines in the world that existed before the crisis struck. The widening income gap between rich and poor, the rising political divide between the incumbent leader and rising power, and the enduring wedge between the real economy and financial markets, have all been exacerbated by this once-in-a-generation public health crisis.
Amid the immense shock, central banks have taken unprecedented steps to prevent the global economy from collapsing into another depression. Their actions have resulted in a paradigm shift in the management of monetary policy.

This has manifested in a rapid expansion of central bank balance sheets that contain a wider variety of assets, monetising fiscal deficit, which allows governments to target liquidity injections, and a more audacious intervention in market forces that enables central banks to not just set the price of money but also influence the value of credit, equities and other risky assets.

Central banks have defended these actions as necessary responses to the unprecedented economic shock and vow to withdraw them once the crisis is over. Just like the quantitative easing enacted after the 2008 global financial crisis, though, shutting off the liquidity tap could prove more challenging than opening it, for several reasons.

First, the global economy remains in the doldrums despite the recent improvement in sequential growth. While the current exit from economic lockdown will spur a mechanical rebound in the second half of this year, most economies will not revert to their pre-crisis levels until well into 2021.

This projection is also predicated on the coronavirus being a one-off shock, which may prove too optimistic given recent developments in the United States. Prolonged delay in growth resumption could enlarge the output gap, perpetuate economic damage and hold back central bank policy normalisation.

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