The International Monetary Fund (IMF) has advised governments and central banks around the planet of the need to carry on providing aid programs and supporting low-interest rates while the Covid-19 pandemic grips us. They have warned that stopping the help at this stage could lead to a stock market crash.
The Full Story
The warning from the IMF came as concern grew about a stock price bubble forming. The international institution, which is based in Washington, pointed out that if interest rates rise or government subsidies are removed, this could lead to a sharp correction across the global stock markets.
They brought out this report to tie in with the World Economic Forum. Among the findings, the IMF have stated that investors are ignoring the most recent data that confirms the way in which the world’s major economies have slowed down as the pandemic drags on.
Fears of the vaccination programme taking longer than initially expected to have an effect has also raised fears that the economic slowdown will last longer than originally believed. In particular, there are fears that developing countries may need to enforce restrictions and lockdowns until we are deep into 2021.
A Look at the Markets
The initial reaction to the pandemic last March was for the markets to drop sharply, especially in industries like tourism and entertainment that were severely restricted by the lockdown. Many companies in these sectors continue to struggle and some need to pay collection agency fees to keep cash flowing in.
Since then, the markets have largely bounced back and some of them have even reached record highs despite the current crisis. A good example is the S&P 500, which contains some of the biggest firms in the US. This index dropped dramatically in March last year but has now climbed to almost 13% above its position in February 2020.
The UK’s FTSE 100 hasn’t seen such a dramatic recovery in the last year and its current position of around 6,600 points is well down from the 7,500 it sat at early in 2020. However, it has regained some of the ground that was lost in the first half of 2020.
Tobias Adrian is the head of financial stability at IMF. Together with his deputy, Fabio Natalucci, he pointed out in a blog post that investors seem to have been lured in by a “sense of complacency”. The analysts believe that a herd mentalist has taken over and that this has led to many investors ignoring the current warning signs.
The blog post continued by pointing out that a “sharp, sudden asset-price correction” could be produced following a series of interest rate rises. When combined with the current vulnerabilities across the financial system, this could severely lower confidence levels and threaten financial stability.
According to this IMF report, the only option for the world’s central banks is to keep interest rates low, while governments need to carry on offering support to the most affected parts of the population. Reducing the scope of these schemes could cause panic in the markets.