3 coun­tries cut in­ter­est rates amid trade war tur­bu­lence

The Standard (St. Catharines) - - Business - ALEXANDRA STEVENSON

Cen­tral banks in In­dia, Thai­land and New Zealand on Wed­nes­day moved to shore up their economies amid fears that global growth will be­come the big­gest ca­su­alty in the spi­ralling trade war be­tween the United States and China.

Mone­tary au­thor­i­ties in all three coun­tries cut in­ter­est rates in a se­ries of un­ex­pected moves that shook cur­rency mar­kets just two days af­ter China al­lowed the yuan to weaken, a move that prompted Pres­i­dent Don­ald Trump to la­bel Bei­jing a cur­rency ma­nip­u­la­tor.

China’s cur­rency has stead­ied in the days since it crossed a crit­i­cal thresh­old Mon­day, but the world’s mar­kets are still un­easy. On Wed­nes­day, stocks on Wall Street tum­bled at the open, los­ing more than 1.5 per cent. The rate cuts sig­nalled that more coun­tries are brac­ing for tougher weeks and months ahead.

“This is a de­fen­sive ac­tion by coun­tries seek­ing to pro­tect them­selves from the col­lat­eral dam­age of ris­ing global trade ten­sions, amid weak­en­ing do­mes­tic growth,” said Eswar Prasad, for­mer head of the In­ter­na­tional Mone­tary Fund’s China di­vi­sion.

In Wed­nes­day’s ac­tion:

• The Re­serve Bank of In­dia cut its bench­mark rate by 0.35 per­cent­age point, in­stead of an ex­pected quar­ter-point cut. It was the bank’s fourth rate cut this year as the gov­ern­ment bat­tles a pun­ish­ing eco­nomic slow­down.

• New Zealand’s cen­tral bank cut its rate by half a per­cent­age point in a move that was in­ter­preted as a de­fen­sive ef­fort to cush­ion a slug­gish ex­port-ori­ented econ­omy.

• Thai­land’s cen­tral bank cut its rate by a quar­ter per­cent­age point, its first rate re­duc­tion since 2015. Thai­land is a big ex­porter to China and the United States, and a weaker Thai cur­rency will help to keep it com­pet­i­tive amid a weaker Chi­nese cur­rency.

The moves come at a time when the global econ­omy is at a cross­roads: last year ev­ery ma­jor econ­omy fi­nally ap­peared to be grow­ing in uni­son, a decade af­ter they were rav­aged in a global fi­nan­cial cri­sis. That growth is now in­creas­ingly threat­ened by a bruis­ing trade war be­tween the world’s two big­gest economies.

China’s cur­rency move in par­tic­u­lar could have a pro­found im­pact on global fi­nances. If Bei­jing con­tin­ues to al­low its cur­rency to weaken against the Amer­i­can dol­lar, more coun­tries could feel forced to re­spond, lead­ing to a dam­ag­ing cur­rency war that could re­vive in­fla­tion and even fur­ther fray the bonds of global trade.

In­vestors’ wor­ries that Aus­tralia’s cen­tral bank may be next to act sent the Aus­tralian dol­lar slid­ing to its low­est level against the Amer­i­can dol­lar in a decade.

“Th­ese moves sig­nal the pos­si­bil­ity of the trade wars mor­ph­ing into a broad cur­rency war that in­volves not just the main par­tic­i­pants in the trade dis­putes but also coun­tries that are on the side­lines but ex­posed to the fall­out,” Prasad said.

The rate re­duc­tions in In­dia and New Zealand were larger than ex­pected, and Thai­land’s cut sur­prised many econ­o­mists. Caught off guard, in­vestors sold the cur­ren­cies of all three coun­tries, weak­en­ing their value against the Amer­i­can dol­lar.

Last week, the Fed­eral Re­serve in the United States cut its bench­mark in­ter­est rate for the first time in a decade in a pre­cau­tion­ary move.

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