Can Central Banks Still Influence Exchange Rates?
For almost two decades, ever since George Soros forced the Bank of England to abandon its exchange-rate target for sterling, conventional wisdom has held that countries’ monetary policy should focus on domestic price stability while letting exchange rates float freely. But that wisdom is now being challenged.
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LONDON – On September 16, 1992, a date that lives in infamy in the United Kingdom as “Black Wednesday,” the Bank of England abandoned its efforts to keep the British pound within its permitted band in the European exchange-rate mechanism. Supporting sterling at the required exchange rate had proved prohibitively expensive for the Bank and the British government. By contrast, it proved highly remunerative for George Soros.