3 countries cut interest rates amid trade war turbulence
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.