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Asian central banks hold steady while sweating on Fed
September 13, 2012 / 9:41 AM / 5 years ago

Asian central banks hold steady while sweating on Fed

SEOUL (Reuters) - Four Asia-Pacific central banks held interest rates steady on Thursday, with global markets sweating both over whether the U.S. Federal Reserve will launch a third round of quantitative easing and Europe’s efforts to allay its debt crisis.

Meeting hours before the Fed’s two-day policy committee was due to announce its decision, the central banks of New Zealand, Indonesia, the Philippines and, surprisingly for markets, South Korea all opted to stand pat.

Analysts had anticipated South Korea, Asia’s fourth-largest economy, would cut rates to support an economy struggling against falling external demand. But, having cut its base rate for the first time in three years in July, the Korean central bank kept it unchanged at 3.0 percent.

“It seems the Bank of Korea wanted to wait and see how the European Central Bank and the U.S. Federal Reserve act next, but it missed the timing for a cut,” said So Jae-Yong, economist at Hana Daetoo Securities in Seoul.

“Still another cut is possible as early as next month. But slashing by more than 25 basis points could be difficult this year because of political events ahead, especially the presidential election in December.”

Central bankers in Japan and India will have the benefit of knowing what the Fed has done when they make their own interest rate decisions next week.

As things stand, Asia’s second- and third-largest economies are expected to leave rates unchanged, though Japan could be forced into some form of easing if any move by the Fed sparks an unwanted rise in the yen.

If the Fed does decide to print more money to go on a bond buying spree, as many analysts expect, it could result in funds flowing both into emerging markets and safe-haven currencies like the yen.


Accustomed to high growth levels, the export-driven economies of the Asia-Pacific region have searched for ways to prop up domestic demand as their main customers in the United States and Europe have bought less and less.

International Monetary Fund deputy managing director Zhu Min told a World Economic Forum meeting in China on Tuesday to beware of worse to come.

“When the growth in the euro area drops to zero, you will see export growth from this region drop to zero, too,” Zhu said.

With fears that Europe is on the brink of its second recession in three years, many Asian economies have looked to China to help keep their growth story going. But the region’s powerhouse has also spluttered due to shrinking Western export markets, and as a consequence has been buying less from its neighbors.

Following discouraging July and August data, hopes that the world’s second-largest economy will see a recovery in growth have been put off until the final months of this year. China is likely to register a seventh consecutive quarter of falling growth in the June-September period, according to a Reuters poll.

China’s central bank has kept interest rates unchanged since cutting twice in June and July, and there have been no further cuts in the portion of deposits banks must hold as reserves, following three reductions between November and May.

“They don’t really have any urgency (in policy easing) at this point. They keep the power dry and they will respond if things get worse,” said Tim Condon, head of Asia research at ING in Singapore.

“The economy is not doing great, but it’s not doing that badly.”

Instead, the People’s Bank of China has stepped up use of shorter term money market tools to keep money markets liquid without resorting to cutting banks required serve ratios.

On Thursday, the PBOC used a 28-day reverse repurchase agreement for the first time on Thursday, the longest tenor reverse-repo issued during open market operations.

“The PBOC is using longer-term reverse repos to replace an RRR cut, implying it is worried that injecting long-term base money could fan inflation again,” said Li Jieming, bond analyst at Sealand Securities in Shenzhen.

Though inflation is low in China, policymakers are wary of any move that could spark price rises when the Communist Party is preparing for a once-in-a-decade leadership change, that could happen as early as next month.


The Philippines, as expected, left its key overnight borrowing rate unchanged at 3.75 percent, citing inflation concerns, though many analysts foresee a cut in the final quarter to offset falling exports as global demand slumps.

Fortunately for Indonesia, falling exports have been offset by buoyant domestic demand, which accounts for 55 percent of the economy, the largest in Southeast Asia.

Inflation is also fairly stable and within the target range, allowing the central bank to hold rates at a record low of 5.75 percent for a seventh straight month. But the central bank is worried about a weakening rupiah and pressure on the balance of payments as imports remain strong, while exports weaken.

“If BI cuts the rate, it would be dangerous for the rupiah. We expect BI to keep the rate steady at 5.75 percent until the end of the year,” Eric Sugandi, economist at Standard Chartered in Jakarta, said.

In contrast, The Reserve Bank of New Zealand was, according to its outgoing governor, in “a reasonably sweet position”, as it left rates unchanged, just as Australia did on September 4.

The New Zealand economy likely grew 2.3 percent from a year earlier during the second quarter, according to a Reuters poll, and inflation of 1.0 percent in the June period was the lowest annual rate in nearly 13 years.

“It can increase rates when required. It can cut rates when required,” RBNZ Governor Alan Bollard told reporters in his last monetary statement before stepping aside next month.

While monetary policy may be on hold in the region, China, South Korea and a number of other Asian countries have announced fiscal stimulus measures in recent weeks to help cushion the blow from slumping external markets, though spending is expected to be more modest than during the 2008/09 crisis, which left a legacy of inflationary pressures.

(Additional reporting by Mantik Kusjanto in Wellington, Se young Lee in Seoul, Rieka Rahadiana and Adriana Nina Kusuma in Jakarta, and Karen Lema in Manila; Writing by Simon Cameron-Moore; Editing by Kim Coghill); +90 212 350 7027; Reuters Messaging:

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