Central bankers should be careful not to ease monetary policy in response to actions by their peers, which may lead to an excessively accommodative stance globally, the former head of the European Central Bank said.
While the U.S. and Europe aren’t trying to weaken their currencies, their unprecedented monetary stimulus has consequences on the global foreign-exchange market, former ECB President Jean-Claude Trichet said in an interview in Singapore on Tuesday.
“Taking into account the exchange-rate position, it is clear that we must avoid any kind of beggar-thy-neighbor posture at the global level,” Trichet said. The risk of such easing is that maybe “we will have too-accommodating monetary policies,” he said.
Central bankers from India to Australia have flagged the need to keep monetary policy loose as easing by their peers leaves them at a disadvantage and their currencies stronger. More than 20 central banks from Canada to Indonesia have cut interest rates this year, with many of the shifts taking investors by surprise, adding to pressure to ease.
The Reserve Bank of India cut rates in an scheduled move last month, alluding to the need to keep up with counterparts in the easing cycle, saying the rupee remained strong relative to peers. Australia’s central bank Deputy Governor Philip Lowe said in March the nation’s stronger currency and lower borrowing costs aren’t at levels that the economy warrants but are unavoidable in an environment of global policy easing.
“The central banks of the advanced economies have embarked on massive accommodation,” said Trichet. “It has a big influence on the monetary policy of other emerging and advanced economies.”