Carney Warns G-20 Against `Zero Sum Game' of Negative Rates

Mark Carney warned his colleagues at major central banks against getting embroiled in a currency war by pushing interest rates too low, saying targeting weaker exchange rates only causes problems for the world economy.

QuickTake The Almighty Dollar

In a 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.”

"It is critical that stimulus measures are structured to boost domestic demand, particularly from sectors of the economy with healthy balance sheets," Carney said in a speech in Shanghai Friday. "There are limits to the extent to which negative rates can achieve this."

Weak growth and muted inflation pressures have pushed central banks around the world to cut interest rates below zero. While G-20 meetings have usually 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.”

“For monetary easing to work at a global level it cannot rely on simply moving scarce demand from one country to another,” Carney said. “For the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero sum game.”

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.”

Negative Rates

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 be willing to push it lower if risks warranted such a move. Carney said central banks alone can’t be expected to boost growth.

"Instead, policy needs to increase primarily domestic demand, with the exchange-rate channel more a side effect that accompanies any monetary policy action," Carney said. "Ultimately, for monetary policy at the zero lower bound to bridge to a better equilibrium, it must be reinforced by other policies."

Carney, who is chairman of the Financial Stability Board, 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.”