Edwards – of the bank Société Générale – argues that as well as creating a challenge for China’s Asian rivals by making its exports more competitive a cheaper yuan will send ‘a tidal wave of deflation’ breaking over the world economy.
Central banks in the US and the UK have primed investors for interest rate rises – with the Bank of England Mark Carney pointing to the turn of the year for a move and Janet Yellen, at the Federal Reserve signalling that a tightening could start as soon as September.
Edwards argues that instead of pushing up rates central banks in the west should be preparing themselves to ward off a deflationary slump.
In the period running up to the financial crisis of 2008 which became known as the ‘Great Moderation’ inflation in the west was kept under control by the influx of cheap commodities and consumer goods from China and other low-wage economies.
Economies including the UK and the US were able to expand more rapidly than they otherwise might have done – without generating a surge in inflation.
But today with inflation already close to zero – indeed at zero in the UK – China’s decision to devalue could bring a fresh wave of price weakness to the west.