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Many developing countries are using exchange rates as their key tool for monetary policy instead of stimulating domestic demand, spreading the risk of a war between currencies in the near future. The big concern of Sir Mervyn King, Governor of Bank of England, points out the necessity for the G20 group to address global imbalances and prevent another financial meltdown.
“The need to rebalance is not confined to those countries that had large trade deficits,” said Sir Mervyn late yesterday in New York. “The contrast between the deficit and surplus countries is one overshadowing us all. My concern is that in 2013 we’ll see the growth of actively managed exchange rates as an alternative to the use of domestic monetary policy.”
According to many experts, the contrast between countries as the UK and the US, which relied on consumer spending to fuel growth before 2008, and those like China and Germany that relied on exports, was one of the main cause of the financial crisis.
“Currency’s tensions” said Gianluca Benigno, professor of Economics at the London School of Economics, to ADVFN Financial News “are already in act: in fact Brazil has already enhanced capital controls as a tool to limit the appreciation of the real and the Bank of England itself has signaled some implicit preference towards a weaker currency.”
A cheaper currency, in theory, makes exports competitive and helps to boost economic outlook. Countries like Switzerland, Japan and Brazil are trying to keep their currency down to keep the benefits of exports. In the meanwhile, the traditional policy tool used by central bankers – cut of interest rates – has been pushed to its limits. In the US, Europe, Japan and the UK interest rates are near zero. Even quantitative easing (the massive purchase of treasuries by a central bank to spur circulation of money and lending to businesses and families) must have a limit, instead of being another way to print money and create debt.
“A global solution for the devaluation of developing countries’ currencies is not easy” said Tom Kirchmaier, professor at London School of Economics and expert of central banks quoted to ADVFN Financial News. “Chinese economy must be rebalanced but the political issue is huge there. State enterprises ruled by the Communist party work because they rely on massive exports. Otherwise they won’t be successful at all.”
King, who is due to retire in June and leave his seat to the Governor of the Bank of Canada Mark Carney, said the UK may see some better conditions in 2013 and the squeeze on consumers “should diminish” over the course of the year. Regarding future moves of the Bank of England, the Governor was elusive: “We don’t believe in the Bank of England we have a crystal ball which enables us to foretell the future. We simply do not know what we will be deciding in six, 12 months, two years from now.”
