The European Central Bank (ECB) and the Bank of Japan (BOJ) are essentially trying to push down the values of their respective currencies with the use of negative interest rates, former Bank of England Governor Mervyn King said.
“There are clearly limits” to the effectiveness of negative rates, King said in a interview in New York.
“I think you can see with Japan and the euro area, that in essence, the central banks are trying to push down the exchange rate.”
“ Most countries in the world could say now, ‘If only the rest of the world was growing normally, we’d be fine. But since it isn’t, we aren’t. What’s left? Push down the exchange rate’,” he pointed out.
The ECB and BOJ contend they’re not intentionally aiming for weaker currencies with easing policies aimed at boosting growth and inflation. ECB President Mario Draghi said earlier this month that while “it is true that some of the measures have obviously a spillover on the foreign-exchange market,” the measures introduced “are entirely addressed to our economy” and that the ECB is “not in this war at all.”
The BOJ has denied it’s seeking to manipulate the yen’s exchange rate.
Global finance ministers and central bankers, in their Group of 20 meeting in Shanghai last month, had reiterated past pledges to refrain from competitive devaluations of their
The euro has risen 2.7 percent on a trade-weighted basis this year.
“Not everyone can push down the exchange rate — so far, most countries have been trying to do that at the expense of the US dollar,” King said.
“Now even the Federal Reserve is concerned about the strength of the US dollar,” he strongly maintained.
While minutes of the BOE’s meeting this month show officials didn’t discuss negative rates during their latest decision, King’s successor, Governor Mark Carney, told lawmakers last month that officials have “considerable room” to ease policy if needed. Looming over the UK outlook is the country’s June 23 referendum on membership of the European Union.
BOE officials say uncertainty surrounding the vote has caused sterling to depreciate and may weigh on growth and investment, and Carney has been pulled into the political debate. King, who was head of the U.K. central bank from 2003 to 2013, said taking a stance on “Brexit” would be “unfair” to Carney.
At the same time, “the euro zone faces very serious problems from which there is no easy way out” and “it was a mistake to create the single currency,” King said.
ECB, which is strategically tackling the issue of negative interest rate, is the central bank for the euro and administers monetary policy of the Eurozone, which consists of 19 EU member states and is one of the largest currency areas in the world. It is one of the world’s most important central banks and is one of the seven institutions of the European Union (EU) listed in the Treaty on European Union (TEU).