Bank of England Governor Mervyn King on Monday said he was concerned that countries will increasingly resort to "actively managed exchange rates" next year, in place of domestic monetary policies, if the global economy remains unbalanced.
King outlined the external threats facing the struggling UK economy, including the euro zone crisis and the U.S. "fiscal cliff," the full effects of which he expects the United States to avoid. But in a speech in New York, he chose to highlight growing worries over central banks using their policies to influence domestic currencies.
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If countries do not work to rebalance the global economy, "my concern is that in 2013, what we will see is the growth of actively managed exchange rates as an alternative to the use of domestic monetary policy," King told the Economic Club of New York.
"You can see, month by month, the addition to the number of countries who feel that active exchange rate management, always to push their exchange rate down, is growing," said King, who is set to step down as Bank of England Governor in July.
Central banks, including that of England, have kept interest rates very low and used unprecedented policies such as massive asset purchases to battle recession. Such easing in developed economies, however, can put upward pressure on currencies of emerging economies, hurting those countries' exports.
The BoE, which has so far bought 375 billion pounds ($603 billion) to help lift the UK economy out of the doldrums, decided last week to keep its main interest rate at a record-low 0.5 percent.
"With interest rates at very low levels, with balance sheets having expanded a great deal and with the inability of monetary policy to indefinitely postpone the adjustments required to bring about rebalancing, some other mechanism will be needed," King said without elaborating on the mechanism.
King's warnings echo those made in October by U.S. Federal Reserve Chairman Ben Bernanke, who delivered a blunt call for certain emerging economies to allow their currencies to rise.
The Fed's ultra easy policies, which depress the U.S. dollar, has been a target of criticism from Brazil and other countries whose currencies rise as a result. Emerging economies have at times intervened in currency markets to curb that effect, complicating any coordinated efforts to recover from the Great Recession.
"It is fair to say a recovery of a durable kind is proving elusive," King said in his speech.
THE GOVERNOR'S WIFE
Fielding questions later, the head of the BoE said he has "great confidence" that the United States will avoid fully triggering the fiscal cliff of automatic U.S. tax increases and spending cuts due to come into force starting January 2013.
It "will find a way, if not avoiding going over the cliff, then hanging on by the finger tips" on the other side, he said to laughter in the audience.
Britain recorded economic growth of 1.0 percent in the third quarter, marking an end to nine months of recession - its second since the 2008-09 financial crisis. But most of the rebound was driven by a technical bounce due to the London Olympics and extra public holidays in the preceding quarter.
The euro zone debt crisis, high inflation and fiscal austerity have weighed heavily on the economic recovery.
Turning to the ongoing euro zone crisis, King said "a black cloud of uncertainty" has drifted across the English Channel and "covered our business sector with uncertainty and diminished what would otherwise have been a recovery in investment spending."
He added: "The problems in the euro area do not seem capable of easy resolution."
The address may be one of King's last in the United States. Mark Carney, currently the head of Canada's central bank, is set to be the first non-Briton to lead the BoE next summer.
King recalled the day his wife saw the surprising news that Carney was named to the post.
"She said, 'You know Mervyn, they'll miss you, or six months down the road they'll miss you'," King told the audience.
"And then she looked at the TV screen and said: 'He's very young, he's immensely charming and he's very charismatic. I'll think he'll do a great job and they won't miss you at all'."
($1 = 0.6221 British pounds)
(Reporting by Jonathan Spicer and Edward Krudy; Additional reporting by Steven C. Johnson; Editing by Theodore d'Afflisio)