Financial markets were largely caught by surprise by the easing, whether it was rate cuts by the European Central Bank (ECB) and Peru's central bank, the Czech Republic’s decision to intervene in currency markets or Denmark’s decision to break with tradition and keep rates despite the ECB cut.
But what is now less of a surprise, and more worrying, is the growing use of exchange rates as a policy tool, either to prevent deflation or to boost exports by making them cheaper.
This is happening despite the oft-repeated assurances by global policy makers that “we will refrain from competitive devaluations and will not target our exchange rates for competitive purposes,” to quote the Group of 20’s latest declaration from St. Petersburg, Russia.
A 7 percent rise in the euro against the U.S. dollar from early July to late October undoubtedly caused some concern, albeit so far unspoken, among ECB policy makers. But it was left to Australia to lift the veil and point out the uncomfortable truth that many countries are now pinning their hopes on exports to boost growth as interest rates are already cut to historic lows and growth remains lacklustre.
The Australian dollar is “uncomfortably high,” bemoaned Glenn Stevens, governor of the Reserve Bank of Australia.
“A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy,” he said, continuing his recent campaign to talk down the Aussie and boost exports.
While ECB President Mario Draghi did not refer to exchange rates – a fall in inflation gave him more than enough reason to cut rates – the reaction of markets to this week’s events was the same, a result that must have pleased many policy makers.
The euro dropped from 1.35 to the U.S. dollar to 1.34, the Australian dollar dropped from 0.95 U.S. dollar to 0.94, the Czech koruna fell from 25.8 to the euro to 27 and Peru’s sol fell to 2.79 to the U.S. dollar from 2.77.
At the moment policy makers' explicit or implicit use of exchange rates is not on the political agenda, but the obvious danger of a global beggar-thy-neighbor policy will undoubtedly soon surface if the global economy continues to be stuck in a rut.
A total of 17 central banks decided on their monetary policy stance last week, with four cutting rates (ECB, Peru, Romania and Serbia) while the other 13 banks maintained their rates, accelerating this year’s dominant trend of rate cuts.
The banks that maintained their rates include Zambia, Uganda, Tunisia, Australia, Kenya, Georgia, Iceland, Poland, the United Kingdom, Denmark, Malaysia, the Czech Republic and Russia.
The four rate cuts this week raised the total number of rate cuts this year to 102. But the percentage of decisions favouring easier policy was unchanged on the week at 23.2 percent of this year’s 439 policy decisions by the 90 central banks followed by Central Bank News. Compared with end-June, the percentage of rate cuts is still down from 25.3 percent after six months, reflecting the upward shift in rates among some of the major emerging markets.
There were no rate rises this week, leaving the number of rate increases this year steady at 23 for the second week in a row. The percentage of rate rises was steady at 5.2 of this year’s 439 decisions, up from 4.7 percent at the end of the first six months.
LAST WEEK’S (WEEK 44) MONETARY POLICY DECISIONS:
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|RUSSIA (NEW RATE)||EM||5.50%||5.50%||8.25%|
This week (week 46) seven central banks are scheduled to hold policy meetings, including Sri Lanka, Latvia, Armenia, Indonesia, Croatia, Mozambique and South Korea.
The Bank of England will release its highly-anticipated inflation report on Wednesday. The report is expected to show that the UK economy is growing faster than previously expected with the unemployment rate hitting the BOE’s 7.0 percent threshold prior to mid-2016, paving the way for an earlier-than-projected rate rise.
The past and future of U.S. monetary policy will be scrutinized on Thursday as Janet Yellen, nominated to succeed Federal Reserve Chairman Ben Bernanke, testifies to the Senate Banking Committee.
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