January 24, 2013 / 9:56 AM / 5 years ago

Bundesbank warms to capital controls in currency war debate

FRANKFURT, Jan 24 (Reuters) - One of the Bundesbank’s top officials on Thursday signalled a break in the Germany central bank’s long-held opposition to the regulation of capital flows, saying limited use of controls could sometimes be appropriate.

In a guest column published in German financial daily Handelsblatt, board member Andreas Dombret said direct capital controls could be considered if other measures failed to work.

Having for decades rejected such controls, the Bundesbank is shifting its position, with an acceptance of some control if measures such as increasing reserves or making foreign exchange rates more flexible do not work.

Bundesbank President Jens Weidmann this week joined top central bankers in speaking out over the risk of competitive devaluations - countries encouraging their currencies to weaken in order to boost the attractiveness of home-grown products.

Policymakers in advanced countries, particularly Japan and the United States, have been pursing aggressive action to reflate their economies. This has the effect of weakening their currencies on foreign exchange markets.

As well as boosting a country’s outward trade, it also make locally-made goods more attractive by pushing up the price of imported goods.

Investment, meanwhile, shifts into higher-yielding currencies, particularly in emerging markets, making them even less competitive..

“If measures to limit capital flows are applied in exceptional cases, they should be temporary, transparent and targeted and as much as possible should not harm others,” Dombret wrote.

He said the Bundesbank broadly shared the view of the International Monetary Fund, which in December unveiled principles for how countries should manage international capital flows.

Countries from Brazil to Indonesia, South Korea, Peru and Thailand have all imposed controls to limit inflows since 2009, while a few countries like Argentina, Iceland and Ukraine have sought to stem large or sudden capital outflows.

It has raised concerns among some economists that this could trigger a global currency war.

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