Bank of England Governor Mervyn King said the U.K.’s recovery may require a weaker pound, highlighting communication challenges for central bank chiefs as the Group of Seven works to prevent a global currency war.
“One way or another we clearly have to change the relative price of the goods that we produce at home compared with those abroad,” King said in London today. The remarks came after he said yesterday’s G-7 statement reflected a “longstanding” pledge “that we will not engage in unilateral intervention” on currencies.
The G-7 roiled currency markets by issuing a statement on exchange rates that was subsequently subject to conflicting interpretations by members. King, among the signatories of the statement, is also trying to revive an economy struggling to build momentum even after unprecedented monetary stimulus.
“He’s trying to tread a fine line between preventing global currency wars while suggesting that there’s perhaps scope for the pound to fall further in response to economic fundamentals,” said Vicky Redwood, an economist at Capital Economics Ltd. in London and a former central bank official. “For now it sounds like the MPC doesn’t condone intervention but would like to see a weaker pound.”
Prime Minister David Cameron said today that “no one wants to see a string of competitive devaluations.” Sterling has dropped about 25 percent on a trade-weighted basis since the start of 2007.
“I don’t believe that you can depreciate your way to growth whatever country you are,” he said in Parliament. “What you should do is use the benefit when there is a structural change, to make sure you increase your competitiveness.”
King said the U.K. needs “to persuade people to buy more from us and for us to be willing to buy less from overseas to improve the trade deficit, and see that boost from external demand.” Britain must “adjust to a new path.”
He said the BOE still has the capacity to support the economy with monetary policy, and any central bank action will have an impact on currencies.
“When countries take measures to use monetary stimulus to support growth in their economy, then there will be exchange-rate consequences, and they should be allowed to flow through,” King said. “The G-7 statement is meant to underpin the world of floating exchange rates.”
The governor also said the statement emphasized that intervention would be done only in a “concerted, collective way when there was a disorderly market position.” Still, he noted the confusion in the aftermath of the statement.
“When I put my name to that statement yesterday, I didn’t expect that other so-called officials will be out there giving unattributable briefings, both before and after the statement, trying to claim that the statement said what it didn’t say,” he said.
“It’s not black and white because the exchange rate is one of the channels for monetary policy,” said Simon Hayes, an economist at Barclays Plc in London. “You’re treading something of a tightrope whenever you talk about the currency from the position of a central bank.”