More than 30 central banks around the world have cut interest rates this year, as countries move to shore up their economies over rising concerns about global growth, trade conflicts and the threat of a messy British exit from the European Union.
Last week alone, India, Thailand and New Zealand unexpectedly lowered rates or cut by more than expected. And as President Donald Trump admonishes the Federal Reserve to continue dropping its benchmark interest rate, many of the world's largest economies also have begun reducing borrowing costs or are considering doing so.
The moves collectively end an era when major central banks hoped, and in some cases tried, to return low rates and large balance sheets -- hallmarks of recovery efforts after the recession -- back to normal levels.
Now policymakers are reorienting their efforts toward steeling their economies against recession risks. The last time so many of the world's major economies cut rates or considered stimulus in unison was during the financial crisis, according to data from Refinitiv.
Many analysts say the moves could help to stave off a painful downturn. But there is a danger: This could also tip off a monetary-policy race to the bottom.
Traditionally, central bankers have cut rates or bought bonds to stoke spending and borrowing at home. But in many places, inflation and interest rates are stuck at historically low levels, so policymakers have less room to encourage lending and spending with cheap money. As a result, rate cuts could increasingly focus on keeping currencies cheap.
A cheaper currency allows a country to export more goods and services while making imports more expensive, in effect helping to prop up domestic prices.
"Increasingly, we may be looking at a world where the exchange rate becomes the objective of monetary policy, of interest rates," said David Woo, head of global interest rates and foreign exchange research at Bank of America Merrill Lynch. "There's no growth, there's no inflation, so you can justify it -- we're weakening the currency to import inflation."
Central banks have always watched currency levels, and their interest-rate moves affect them. But most have avoided explicitly tying monetary decisions to foreign exchange out of fear of being called manipulators, which could bring geopolitical risks.
The lines are blurry, but that designation is usually reserved for political authorities that directly buy and sell currencies to change their prices and gain a competitive edge. The United States labeled China a manipulator last week.
But as ways to stimulate domestic activity with monetary policy look increasingly tapped out, less explicit attempts to guide currency prices -- by changing rates and buying bonds -- might become a more important part of central bankers' playbooks. Jeremy Stein, a former Fed governor, warned that if central banks increasingly competed on foreign exchange, the risk fell short of a full-blown currency war but could touch off a "sort of competitive easing" -- a rush to cut rates first to reap the currency benefits.
The Bank of Japan took the rare step of tying currency to a potential monetary policy move in February when its leader told lawmakers that it could be forced to enact additional stimulus if the yen kept strengthening. Otherwise, he argued, the nation's dangerously low inflation might turn even lower.
When Australia's central bank cut rates in June, according to meeting minutes, officials there recognized that "the main channels through which lower interest rates would support the economy were a lower value of the exchange rate" and lower household borrowing expenses.
In a world with already low interest rates, "the international environment becomes more important, because depreciation of the currency is the one remaining option," said Joseph Gagnon, an economist at the Peterson Institute for International Economics and formerly the Fed. "And surely that has problems, because currency depreciation is a zero-sum game: Anything you get, the other guy loses."
Using rates to control currency levels could prove costly. Any stimulus that a central bank can eke out of devaluation comes at a direct expense to its trading partners, and is likely to be short-lived before other countries cut rates or buy bonds to compete.
Temporary benefits, like an increase in exports or inflation stabilization, might take the pressure off policymakers to enact longer-term economic changes, like industrial reorganization and workforce training.
The European Central Bank is expected to cut rates further into negative territory next month. Woo of Bank of America said he saw such moves as targeting currency, given that the demand-stoking benefits of negative rates are widely disputed.
Business on 08/16/2019