Vaccines Inoculate Markets, but Policy Support Is Still Needed

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Vaccines Inoculate Markets, but Policy Support Is Still Needed


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.
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