Central banks could be pressured into competitive devaluations

Reuters is reporting that the Bendesbank chief, Jen Weidmann, is concerned that central banks are being pressured to pursue more aggressive monetary policies that could risk a “currency war”.

Weidmann is the latest in a string of policymakers worldwide to warn of the threat of a ‘currency war’ as central banks pump out cash to support their economies, reducing their value in the process.”

“He said the pressure that Japan’s new government has put on the BOJ to deliver bolder monetary easing endangered the central bank’s independence, as did the actions of Hungary’s government.”

“‘Already alarming violations can be observed, for example in Hungary or Japan, where the new government is interfering massively in the business of the central bank with pressure for a more aggressive monetary policy and threatening an end to central bank autonomy. A consequence, whether intentional or unintentional, could moreover be an increased politicisation of exchange rates, …So far the international currency system has come through the crisis without a devaluation competition, and I hope very much that remains the case,’ Weidmann added in a section of his speech entitled ‘independence of central banks in danger’.”

“Last Wednesday, Russian central banker Alexei Ulyukayev said Japan is acting to weaken its currency and there is a danger that others will follow suit and foster a round of destabilising devaluations.”

“Plans for the ECB to begin supervising banks were consistent with a trend outside the euro zone for central banks to be given more tasks that lie beyond their core mandate, Weidmann said.”

Read the Reuters post here.


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