The Global Financial Stability Update at a Glance
Approval and rollout of vaccines have boosted expectations of a global recovery and lifted risk asset prices, despite rising COVID-19 cases and softening economic activity in late 2020.
Until vaccines are widely available, the market rally and the economic recovery remain predicated on continued monetary and fiscal policy support. Inequitable distribution of vaccines risks exacerbating financial vulnerabilities, especially for frontier market economies.
An ongoing rebound of portfolio flows provides better financing options for emerging market economies facing large rollover needs in 2021.
Policy accommodation has mitigated liquidity strains so far, but solvency pressures may resurface in the near future, especially in riskier segments of credit markets and sectors hit hard by the pandemic. Credit concerns and profitability challenges in the low-interest-rate environment may weigh on banks’ ability and willingness to lend in the future.
Policymakers should continue to provide support until a sustainable recovery takes hold: under-delivery may jeopardize the healing of the global economy. However, with investors betting on a persistent policy backstop and a sense of complacency permeating markets as asset valuations rise further, policymakers should be cognizant of the risks of a market correction.
With monetary policy anticipated to remain accommodative in coming years, policymakers should address rising vulnerabilities to avoid putting growth at risk in the medium term.