However, as we saw in the mid-2000s, there is also the associated risk of upward pressure on inflation from global energy and other commodity prices, if the momentum of world growth becomes too strong. Fourth, the high degree of stimulus provided by fiscal and monetary policy to combat the recession will need to be withdrawn over a period of time. Returning budget deficits to a more sustainable level will require a prolonged tightening of fiscal policy in many countries, including the UK. Monetary policy can provide an offset by continuing to support the growth of private spending – though the appropriate degree of monetary stimulus will need to be continually reassessed in the light of the progress of the recovery at home and abroad and its impact on inflationary pressures. Given the turbulence we have seen in the major economies of the world over the last two years, it is very natural to worry about setbacks to the recovery, both in the UK and overseas. In the past, economic recoveries have not been smooth and linear. So we should expect to see some variability in growth rates, both at home and abroad, as this recovery develops. However, looking through this data volatility, there are also good grounds for expecting the growth of the world economy to continue to provide a healthy support to the UK’s economic recovery over the years ahead.
The euro area repo market has also been largely unscathed by the pandemic, remaining a fully functional market even at the peak of the crisis. According to data from the International Capital Market Association (ICMA), the total value of the outstanding repo contracts has barely changed from December 2019 to December 2020 at EUR 8,300 billion (including both repo and reverse repo transactions). This is an all-time high with a repo market size up by more than 40% in 10 years. However, the euro area repo market can be affected by collateral scarcity and seasonality, especially at the end of the year, considering also the important share of Hold-to-maturity investors. In this regard, Eurosystem has made available government bond holdings for securities lending since April 2015. The Eurosystem securities lending programme has been successfull in helping to normalize market rates and in acting as a backstop facility for market participants. For instance, in April 2021, EUR 71.5 billion of public sector bonds were lent out on average with a breakdown of EUR 59.5 billion against securities and EUR 12.0 billion against cash collateral. Another key feature, which has helped to support the liquidity of the euro area repo market, is the dominant share, two-third, of repo market trading cleared via central clearing counterparties (CCP), despite the absence of any mandatory clearing on these instruments.