Mark Carney warned his colleagues at major central banks against getting embroiled in a currency war, saying targeting weaker exchange rates only causes problems for the world economy.
In a hard-hitting speech at the start of a two-day gathering of Group of 20 finance ministers and central bankers in Shanghai, the Bank of England governor said nations can’t simply export their problems through currency depreciation and that there is “no free lunch.”
“For monetary easing to work at a global level it cannot rely on simply moving scarce demand from one country to another,” Carney said in prepared remarks for his speech. “For the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero sum game.”
Weak growth and muted inflation pressures have pushed central banks around the world to cut interest rates below zero. While G-20 meetings have habitually agreed on the need to refrain from competitive devaluations, it’s become a more pressing issue with about a quarter of global output now produced in economies where rates are, as Carney put it, “literally through the floor.”
Investor concern about the ability of monetary authorities to boost demand has helped spur market turmoil this year. Carney said that while it’s a “myth” that central banks are out of monetary-policy ammunition, G-20 leaders need to urgently co-ordinate supply-side initiatives as they are falling short on previous pledges.
“Since the start of the year, risk sentiment in financial markets has deteriorated sharply, stemming in large part from a renewed appreciation of weak medium-term global growth prospects accompanied by marked downside risks,” Carney said. “The global economy risks becoming trapped in a low growth, low inflation, low interest-rate equilibrium.”
The Bank of Japan adopted negative interest rates this year and the European Central Bank has indicated it may ramp up its stimulus next month, with one option being cutting its deposit rate further below zero. In the U.K., the BOE’s benchmark has been at 0.5 percent for almost seven years, though some officials have indicated they’d bewilling to push it lower if risks warranted such a move.
The BOE governor also said that there are implications of targeting a weaker exchange rate.
“To the extent it pushes greater savings onto the global markets, global short-term equilibrium rates would fall further, pulling the global economy closer to a liquidity trap,” Carney said. “At the global zero bound, there is no free lunch.”