Shanghai to Hangzhou: Does G20 run monetary policy?

After the G20 Summit in Shanghai in February 2016, there was a widespread belief that the G20 secretly instituted a “Plaza Accord” agreement to stem the rise of the U.S. dollar primarily by using monetary policy. We do not know whether there was such an accord or not, but we do know that post Shanghai, the ECB and the BOJ signalled a reduction in monetary easing and the US took a break from monetary tightening causing the Trade Weighted Dollar to drop by over 5%. A Google search for “G20 Shanghai Plaza Accord” returns nearly 10,000 results.

The aftermath of the G20 summit in Hangzhou earlier this month adds to the suspicion that monetary coordination happens at G20 summits. The markets now fear that we are on the verge of a coordinated tightening – the ECB disappointed expectations on continuation of QE, the BOJ started having doubts about negative interest rates, and the US Fed is sounding more hawkish than it has in recent months.

I am reminded of the Chicago saying from the Goldfinger film in the James Bond series: “Once is happenstance. Twice is coincidence. The third time it’s enemy action.”

We are still at the coincidence stage of this progression and it will take another G20 summit for us to start wondering whether the omnipotent “independent” central banks are just pawns in the hands of the G20 leaders.

Posted at 1:18 pm IST on Sat, 10 Sep 2016         permanent link

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