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Global Currency War Tumbles as Eurozone, India Signal No Further Stimulus

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Eurozone - Sputnik International
The Eurozone and India, having revised upward their respective growth targets, are gaining confidence in their growth outlook, possibly abstaining from further stimulus and devaluations.

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Kristian Rouz — The wave of massive currency devaluations seen across the world over the past year and dubbed as the ‘global currency war’ is about to halt, if not reverse, in the near future, as some of the largest advanced and developed markets have adjusted to the new reality of mediocre growth.

Even despite the alarmingly low inflation, both the Eurozone and India signaled this week their respective authorities would abstain from adding further accommodative policies to their respective economies.

The upbeat growth and a rather optimistic outlook for both India and the Eurozone have demonstrated there is no real necessity in further devaluing their currencies for competitiveness. This, however, might exacerbate the scale of future devaluations in economies still struggling with their structural complications, like Brazil, mainland China and South Africa.

Ewald Novotny, board member of the European Central Bank (ECB) Governing Council, in his TV interview on Wednesday expressed the regulator’s reluctance over expanding stimulus measures, like bond-buying, in the future.

“Monetary policy should be a steady-hand policy. We shouldn’t act in a too-active way,” Novotny said during his interview in Vienna.

Currently, the ECB is buying roughly $60 bln worth of state and private bonds in the 19 member states of the Eurozone on a monthly basis, with the total value of the stimulus to the bloc’s economy estimated at $1.2 trln by the program’s end, planned for September 2016.

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The bond-buying program is designed to add money liquidity to the Eurozone’s economy, helping economic growth. Also, the ECB policies are aimed at boosting the currently low inflation, a threat to economic stability in the entire region. The core prices index is expected at 1.1% in 2016 and 1.7% in 2017, whilst the ECB inflation target is 2%.

The ECB recently indicated further accommodative measures might be enacted only if the global outlook exacerbates significantly. The principal concern is weak growth in mainland China weighing on commodities prices and thus undermining inflation in the advanced nations. However, as domestic growth in the Eurozone is picking up, it might yield enough support to inflation in the short-to-mid term.

Novotny’s commentary stirred speculation of the ECB possibly withdrawing from the global war of currency devaluations. The euro rose on the news to $1.1126.

Similarly, India’s economic authorities signaled their growth expectations are optimistic enough so that they could afford to abstain from further stimulus. As outlined by Wednesday’s commentary by chief economic adviser to New Delhi Arvind Subramanian, India’s government is expecting growth of 8.1-8.5% this financial year, which is significantly above the current 7% annualized economic expansion.

"I don't think extra stimulus at this stage is necessary," Subramanian said.

Spending from India’s federal budget, along with robust consumption have contributed to the acceleration of the nation’s economy. While the budget deficit is within the targeted 3.9%, and inflation at its low of 3.66% in August, the nation might have considered additional economic stimulus, if the optimistic macro data had not offset most of the anxiety.

Meanwhile, the nation’s finance minister is actively pressuring the Reserve Bank of India (RBI) to cut interest rates in order to support growth.

US Secretary of State John Kerry (C) speaks Indian External Affairs Minister Sushma Swaraj (L) during a US-India Strategic & Commercial Dialogue plenary session at the US Department of State in Washington, DC, September 22, 2015, with US Secretary of Commerce Penny Pritzker (R) - Sputnik International
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However, the RBI lowered its borrowing costs by 0.75% so far this year to 7.250% in response in the global slump in commodities and struggle for competitiveness. India’s national currency, the rupee, has declined against the dollar by some 10% this year.

However, if New Delhi manages to abstain from further stimulus, the rupee might acquire more sustainability, with its FX rate stabilized.

Now, in the event that the euro and the rupee halt their slide against the dollar and at the very least remain stable in the medium-term, both India and the Eurozone will effectively exit the global currency war, not least due to a more stable growth outlook. On a global scale, the US and the UK have already voiced their intentions to return to more conventional monetary and fiscal policies, and the recent developments have demonstrated the Eurozone and India might follow their lead as soon as in late 2016-early 2017.

If that happens, economies on the other side of the currency war, like mainland China or Brazil, might either spur their structural reforms to ensure more stable growth, or respond with even greater devaluations in order to support growth in absence of effective reforms.

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