More than 30 central banks around the world have cut interest rates this year, as countries move to shore up their economies amid rising concerns over global growth, trade conflicts and the threat of a messy Brexit.
Over the past two weeks, 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 have also 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 Great 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.
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.
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.”