Wed, Nov 11, 2015 - Page 15 News List

Currency war hits non-euro nations

COLLATERAL DAMAGE:Central banks of EU nations that are not in part of the euro area had to find ways to hit their policy targets amid monetary easing from Frankfurt


In Denmark, unemployment is below 4 percent and the price of owner-occupied apartments rose 10 percent in the past year — yet action might be needed if the krone’s peg to the euro is to be maintained.

Moreover, figures published yesterday showed inflation slowed last month and Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S in Copenhagen, said conventional policy might have run out room.

“The deposit rate is probably at the effective lower bound at minus-0.75 percent,” he said. “If the Danish central bank has to respond to any new ECB actions that might trigger a stronger Danish krone, they’ll probably have to step up intervention again.”

Czech central bankers are having to push back the date on which they can give up their unpopular currency cap.

The Czech National Bank is struggling to normalize monetary policy even though it forecasts this year’s GDP would expand by 4.7 percent.

ECB officials can do little more than shrug when confronted with the distortions they are causing.

“We are mindful of the impact of our decisions on the rest of the world and in particular on neighboring economies,” ECB executive board member Benoit Coeure said on Nov. 4. “But our mandate is limited to the euro area.”

The ECB is not immune to policy overspill. Its decision next month might be influenced by the likelihood of the US Federal Reserve raising its own borrowing costs after seven years of near-zero rates. In that event, the best-case outcome for Draghi’s neighbors would be a diversion of global financial flows toward the US, and a stay of action in Frankfurt.

In the meantime, one nation has avoided contorting its policy framework to respond to euro-area pressure. Its approach: Ignore the inflation target.

Rather than expand its balance sheet in a vain attempt to stoke prices, the National Bank of Poland has reinterpreted its inflation goal and tolerated the longest bout of deflation since the communist era.

Marek Belka, the NBP’s governor and a former IMF official, has deferred a decision on cutting rates until next year, citing a healthy economy showing no signs of suffering.

That is a sign that with the ECB dominating monetary conditions for Europe, central banks in faster-growing economies might need to consider whether a narrow focus on consumer-price gains is the best measure of their success.

“Competitive devaluations used to be about getting more growth and now we’re trying to get more inflation without that having anything to do with the underlying economy,” said Anatoli Annenkov, an economist at Societe Generale SA in London. “That shows the desperation we’re in.”

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