The European Central Bank’s hesitancy in raising interest rates to counteract spiralling inflation is compounding problems of misaligned exchange rates, intensifying disequilibrium in international current account balances.

Widespread perception that the ECB is falling behind the US Federal Reserve and Bank of England in rate-tightening, by depressing the euro on the foreign exchanges, is likely to stoke further euro area inflation by raising import prices. Another side-effect is a widening US current account deficit – keeping alive trade imbalances as a disruptive factor in American politics.

Since oil and most internationally traded commodities are priced in dollars, the euro’s fall – to €1.07 from €1.21 a year ago – is adding to inflationary pressures. This is one of the concerns of a minority on the ECB’s governing council who are trying to push the bank into a larger increase in the ECB’s leading interest rates. These council members, including the Bundesbank’s Joachim Nagel and De Nederlandsche Bank’s Klaas Knot, would like the ECB to raise its deposit rate to 0% from -0.5% in July, in action to be deliberated at its meeting on 9 June.

Whether they will get a majority is unclear. Worries about the effects of the Fed’s tightening, together with the phasing out of the ECB’s government bond purchase programmes, are forcing up bond market spreads in Europe. The differential between 10-year yields for German and Italian bonds is now two percentage points, the highest for two years. Similar trends are underway for Spain, Greece and Portugal – forcing up borrowing costs for the euro area’s most highly indebted states.

The ECB’s dilemma over monetary tightening is adding to global imbalances. The weak euro is promoting euro area exports – especially from traditionally strong exporters like Germany – and dampening the competitiveness of US companies, leading to widening trade gaps.

Another big factor has been the renminbi’s 6% decline against the dollar over the last month. The decline does not seem to reflect any deliberate action by Beijing to sell more products to the US, far more the effect of US interest rate policy, Covid-19 shutdowns in China and western sanctions against Russia.

With US imports from China outweighing exports by about four to one, the US has lately been running a trade deficit with Beijing of more than $30bn a month, making an overall deficit on China trade of $101bn in the first three months of 2022. Former President Donald Trump is likely to use the continued huge imbalance in Sino-American trade in his probable bid to secure re-election in 2024.

The overall US trade deficit grew by 22% in March, surpassing $100bn for the first time – up $20bn from February to $110bn, according to the US Census Bureau. Estimates in April from the International Monetary Fund put the euro area’s current account surplus this year at 1.8% of gross domestic product, down only slightly from 2.4% in 2021, in spite of the much higher bill for imported energy. As evidence of the euro area’s strong underlying competitiveness, the current account surplus for 2023 is estimated at 2.2% of GDP.

Germany’s current account surplus – habitually criticised by the US as signalling unduly high savings and insufficient domestic growth – is seen as dipping to 5.9% of GDP in 2022 from 7.4% in 2021. But the surplus will return to 6.9% next year, according to IMF projections.

Imbalances in the two largest Anglo-Saxon economies remain acute. The US current account shortfall is estimated at 3.5% of GDP in 2021 and 2022, falling only slightly to 3.2% next year. The UK deficit in these three years is seen as 2.6%, 5.5% and 3.2% of GDP respectively.

The Chinese current account surplus is projected at a relatively moderate 1% of GDP in 2022 and 2023 after 1.8% in 2021. However, these forecasts were prepared before the latest decline in the renminbi which, if prolonged, is likely to result in a further sharp rise in the Chinese surplus.

Exchange rates are often out of line with countries’ underlying competitiveness because of interest rate differences, which can result in job destruction, disruptive relocation of assets and an upsurge of populist politicians offering simplistic solutions. Central banks need to take their responsibility in this area more into account with a better coordinated approach – as was achieved with international minimum taxing standards on corporate earnings.

Bob Bischof is Vice President of the German-British Chamber of Industry and Commerce. David Marsh is Chairman of OMFIF.