Former Bank of England Governor Mervyn King said central banks risk tipping the world into a currency war as they pursue ever looser policy to stimulate their economies.
“Many countries have now seen that they’ve taken monetary policy about as far as it can go,” King said in a speech on Tuesday in Oxford, England. “With interest rates close to zero, in some cases below, with fiscal policy constrained in many countries, the objective of economic policy will be to lower the exchange rate.”
“There is a real risk that focusing attention on bringing the exchange rate down will become an implicit or explicit currency war,” he said.
More than 20 countries have cut interest rates or taken other measures to ease monetary policy -- moves that can curb demand for their currencies -- since the start of the year. In the euro area, European Central Bank loosening has helped push the region’s currency down almost 20 percent against the dollar in the past year.
“In countries as far apart as New Zealand, Australia, Japan, France, Italy, central banks and governors are becoming more and more strident in their determination towards the exchange rate,” he said. “Some might say we’re already in a de facto currency war.”
King also said that the weak euro-area economy was the biggest constraint on global demand. Officials in the currency bloc have been pursuing a “finger-in-the-dike strategy” and haven’t solved the region’s underlying imbalances, he said.
The euro-area economy grew at 0.4 percent, the fastest pace in almost two years, in the first quarter.
King didn’t comment specifically on the U.K. economy. Mark Carney, his successor at the BOE, on Wednesday cut its growth forecasts through 2017 and endorsed investors’ view for gradual interest-rate increases that may not start until the middle of next year. The BOE’s benchmark rate has been at a record-low 0.5 percent for more than six years.
“Policy seems to be based on the premise that sufficient monetary policy will solve all the global economy’s ills,” he said. “Monetary policy has played a vital part but can do no more.” There must be a shift to increasing productivity growth, raising real incomes, and rebalancing spending and savings, he said.