Central banks may be spreading deflation by easing monetary policy and weakening their currencies, but the biggest threat is that China will wade into the battlefield, analysts say.
“The three trillion dollar question is whether the People’s Bank of China (PBoC) will allow the yuan to depreciate and export their own disinflation to the rest of the world, setting off a series of competitive devaluations in the region,” Nicholas Ferres, investment director at Eastspring Investment said in a note on Friday.
Twenty-four central banks have eased monetary policy this year amid slowing economic growth and deflationary pressure as oil prices hover near six-year lows. In February, the PBoC cut the one-year deposit rate by 25 basis points to 5.35 percent.
For now Chinese authorities continue to keep the yuan in a tight daily trading band against the U.S. dollar; the yuan has lost just 0.9 percent against the dollar year to date. By contrast, the dollar is up 3.3 percent again the Korean won and 4.2 percent against the Singapore dollar.
But the euro’s around 12 percent decline against the greenback so far this year “will likely put more pressure on China to devalue the yuan… [which would] signal that China is joining the currency war,” Bank of America Merrill Lynch (BoAML) FX and Rates strategist David Woo said in a note published on Monday.
“[This is] the biggest tail risk of 2015,” he said.