Global growth calls for a united stance against currency wars

While nations have fought against each other throughout history for a host of reasons, central bankers usually don’t fight wars. But with investors worried about a potentially new recession taking hold, the global economy is now in a precarious situation. Make no mistake, there is an ongoing tussle – intentional or not – to gain the competitive edge, with each country brandishing its currency as a weapon, leading to the “currency wars.” Policymakers cut exchange rates so that goods made by a country’s exporters can be sold cheaper overseas. When other nations retaliate by doing the same, currency wars erupt, hitting the global economic balance.The idea of a currency war became a problematic with China’s surprise devaluation of the yuan in August last year and a further slide in the currency in early 2016. The moves raised concern that China would depreciate the yuan to revive a slowing economy despite denials from Chinese officials. The yuan has weakened 5% versus the dollar since the August devaluation, even as the central bank burnt through more than $400bn of the nation’s foreign exchange reserves over the last six months to support the exchange rate. Japan also jolted markets by introducing negative interest rates, following the European Central Bank’s move below zero in 2014.At least 24 countries cut interest rates last year, with nations from Canada to Singapore unexpectedly easing monetary policy. The currency wars have simmered for years as countries fought their way out of the recession brought about by the 2008 financial crisis. The devaluation of the yuan – the first in more than two decades – prompted calls for clearer communication and a more united stance from the world’s central bankers. Leading to the Group of 20 meeting last week, Bank of England governor Mark Carney warned counterparts against getting embroiled in a currency war by pushing interest rates too low, while International Monetary Fund managing director Christine Lagarde said the effects of monetary policies, even innovative ones, are diminishing.Steep losses on global stock markets and volatility in currencies this year have fuelled calls for G20 members to do more to stoke demand and bolster stability. The IMF last month trimmed its global growth projections and said 2016 would be a “year of great challenges.”The G20 finance chiefs last week agreed to consult closely on foreign exchange markets, while renewing past pledges to refrain from competitive devaluations. They agreed to use monetary, fiscal and structural tools to boost growth.To be sure, every nation is entitled to formulate a monetary policy, which is best suited to stimulate growth. But the “unspoken currency wars” can stifle global economic recovery, creating unjust winners and losers. If devaluation is truly a consequence of prudent monetary policy necessitated by real macro-economic domestic reasons, then nations must make sure to inform and consult with each other. It’ll do a world of good, if there are no surprises, especially given the perilous state the global economy is in.