IMF calls for central banks to keep money tap open amid COVID-19 recovery

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The International Monetary Fund (IMF) called on central banks around the world to continue a policy of accommodative monetary policy until the coronavirus pandemic passes, as tepid roots of recovery begin to hit some economies.

Central banking authorities around the world opened up their coffers to an unprecedented degree last year in the face of an economic crisis caused by the COVID-19 pandemic. In the US, the Federal Reserve announced a dramatic program of bond buying, offering a virtually unlimited amount of money to prop up the world’s biggest economy.

Now, as the pandemic turns one year old, the IMF is calling for central banks to continue accommodative monetary policy, a term referring to when central banks attempt to boost a country’s money supply while keeping interest rates low.

“We would still recommend monetary policy to stay accommodative until we are past the pandemic,” Gita Gopinath, the IMF’s chief economist told Al Arabiya’s Maya Jureidini in an interview Wednesday.

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However, keeping monetary policy loose, essentially leaving the supply of money running, can have negative implications, and leave an economy with too much money, causing inflation to skyrocket, and decreasing monetary value in the long term. Gopinath, however, was optimistic that this situation still remains far away.

“We don't have any expectation that there will be runaway inflation in advanced economies. And there are a couple of reasons for that. One is because inflation expectations remain well anchored and we expect that to be the case. And also, there is still a fair amount of slack in the labor market,” she said.

Gopinath went on to add that central bank easing had “a very important role in preventing a global financial crisis alongside a major collapse in the world economy in 2020.”

Last year, around $14 trillion was deployed by authorities around the world to shield economies from the COVID-19 economic hit, but the use of capital was very unequal, Gopinath noted, with advanced economies spending significantly more.

“Advanced economies deployed about 24 percent of the GDP in fiscal support, emerging markets, middle income countries. That number was six percent and low-income countries, two percent. Now, that's a reflection also of the fiscal space, fiscal capacity that these countries had in terms of providing support. That's another reason why you're seeing very different recoveries around the world,” she explained.

In less advanced economies, where recovery is slower, and distribution of coronavirus vaccines is nascent, Gopinath said it was “very important” for lockdowns to be put in place and to “provide lifelines to households and businesses.”

Vaccine distribution has becoming an increasingly heated topic as supply cannot keep up with demand, leaving richer countries able to secure doses of the lifesaving drug significantly faster than poorer countries. This dynamic will likely push out a full economic recovery from the impact of the pandemic out further towards 2022, Gopinath explained.

“Also [we have] to keep in mind that it still remains the case that by 2025, the cumulative loss to the global economy from this pandemic, relative to what we had projected before, is about $22 trillion. So that's a very sizable amount that still remains to be recovered,” she said.

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