The Covid crisis has required strong and prompt action by central banks consistent with their mandates. In March, disorderly conditions reached the core financial markets, posing a very real threat to the stability of the financial system — by far the most serious threat since the global financial crisis. Underlying this disorder in markets was an economic downturn almost unprecedented in both its scale and pace.
The response has included a major program of asset purchases and lending by central banks, with a corresponding growth of balance sheets. This has been the right thing to do to reduce borrowing costs, boost cash flows and more broadly support economies, and it has shown how essential it is to have truly independent central bankers. But the financial system mustn’t become reliant on these extraordinary levels of reserves.