BlackRock Investment Institute

Macro insights

Fiscal support remains key as monetary space limited

News on Covid vaccines strengthens the argument to ease monetary policy again, as policy support is more clearly building a bridge to a post-Covid world. Our financial conditions indicator shows how key developed market central banks have kept financial conditions as easy as they were before the Covid shock. The ECB is expected to ease further by boosting – and possibly extending – its Pandemic Emergency Purchase Programme this week.

U.S. and euro area financial conditions indicators, 2018-2020

Sources: BlackRock Investment Institute and Bloomberg, December 2020. Notes: The lines show the BlackRock Financial Conditions Indicators (FCIs) for the U.S. and euro area, shown in terms of the consensus pace of growth implied by movements in domestic financial conditions.

Yet monetary policy space is limited, with interest rates near effective lower bounds. This leaves fiscal policy as the main tool to bridge lost income until global activity recovers. The risks around a fiscal extension in the U.S. are significant, given the lack of agreement to extend key measures such as enhanced unemployment insurance. In Europe, negotiations around the recovery fund and multi-year EU budget are being stalled by Poland and Hungary. Yet eventually an agreement is still more likely than not, in our view, lending important momentum to fiscal support through next year and beyond.

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