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.
â€œThere are clearly limitsâ€ to the effectiveness of negative rates, King said in a interview in New York.
â€œI think you can see with Japan and the euro area, that in essence, the central banks are trying to push down the exchange rate.â€
â€œ Most countries in the world could say now, â€˜If only the rest of the world was growing normally, weâ€™d be fine. But since it isnâ€™t, we arenâ€™t. Whatâ€™s left? Push down the exchange rateâ€™,â€ he pointed out.
The ECB and BOJ contend theyâ€™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 â€œit is true that some of the measures have obviously a spillover on the foreign-exchange market,â€ the measures introduced â€œare entirely addressed to our economyâ€ and that the ECB is â€œnot in this war at all.â€
The BOJ has denied itâ€™s seeking to manipulate the yenâ€™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.
â€œNot everyone can push down the exchange rate â€” so far, most countries have been trying to do that at the expense of the US dollar,â€ King said.
â€œNow even the Federal Reserve is concerned about the strength of the US dollar,â€ he strongly maintained.
While minutes of the BOEâ€™s meeting this month show officials didnâ€™t discuss negative rates during their latest decision, Kingâ€™s successor, Governor Mark Carney, told lawmakers last month that officials have â€œconsiderable roomâ€ to ease policy if needed. Looming over the UK outlook is the countryâ€™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 â€œBrexitâ€ would be â€œunfairâ€ to Carney.
At the same time, â€œthe euro zone faces very serious problems from which there is no easy way outâ€ and â€œit was a mistake to create the single currency,â€ 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).