In a world of slowing growth, currency debasement has become the economic weapon of choice.
In the last month alone, we have seen central banking easing measures announced in Romania, India, Switzerland, Egypt, Peru, Denmark, Turkey, Canada, the Eurozone (QE), Pakistan, Albania, Russia, Australia, and China.
More cuts are on the way, we are told, as there is seemingly no end in sight to the tit for tat moves of this global currency war. If we look around the world at the major central banks, with the exception of Brazil (who has been forced to hike because of high inflation), everyone is in easing mode.
Even Russia reversed course in January and cut rates by 2%, shocking everyone after their emergency rate hike in December. Despite year-over-year inflation of 15%, the Russian central bank was under intense pressure to lower rates from industry and commercial banks.
Zero-bound No More
As we have seen, 0% is no longer the lower bound when it comes to central bank actions. After reaching 0%, they have moved to quantitative easing (as was done in the U.S., Japan, and the UK) or the previously unthinkable: negative interest rates.
Last June, the ECB moved its deposit rate to -0.2%. After a few months, this was viewed as “not enough†to crash the Euro and the pressure started building for a full-scale quantitative easing program. The ECB delivered a few weeks ago with a €1.1 trillion plan. With rates already at all-time lows across the Eurozone, the intention of the asset purchase program was clear: debase the Euro.
In response to these actions, Switzerland has moved its target rate down to -0.75% and Denmark moved its benchmark deposit rate to -0.5%. The moves are not over, though, as Denmark is expected to cut its benchmark deposit rate to -1% this week.
Taking a page from the Mario Draghi playbook, Denmark’s Central Bank Governor Lars Rohde has pledged to do “whatever it takes†to keep the Danish krone from appreciating. This may include their own quantitative easing program to further push down yields, Rohde said in a recent interview.
