(I’m setting aside China, which began loosening the monetary and fiscal spigots before the Fed paused. Japan merely kept its ultra-easy policy.)
On February 1, I implored Asian central bankers to do something very straightforward: Just accept the gift the Fed has given you. Almost two months on, it’s not so much whether or when Asia will take the cue, but how to account for the reticence to date.
A combination of conservative forecasting; disbelief the Fed flipped so dramatically; denial the outlook is all that dire; and a nagging sense that their currencies are vulnerable may be at work. Also in the mix: a desire to await the trade war’s denouement and to see if China rights itself economically.
It really does seem like excessive caution if you’re going to end up following the Fed anyway. For all of China’s superlatives, Asia remains largely a dollar bloc. The weight of economic gravity pushes policy toward cuts.Each economy
in Asia has its idiosyncrasies and central banks have mandates bestowed on them by sovereign governments. That didn’t stop them following the Fed on the way up in 2017 and 2018. Indonesia and the Philippines were among the most aggressive in hiking rates, fretting that a wider gap with the U.S. would weaken their currencies. South Korea nudged up its rate once in last year, in what looks like a policy error.
They are right in the sense that there’s no guarantee the Fed is done. But it sure looked like the Fed was just about done by early February. And yet the shift in Asia has been glacial.Any doubt about the intent of American monetary policy ought to have been eradicated this week, with the Fed’s famous dot plot indicating no move for the remainder of this year. Frankly, it’s not hard to envisage a cut given the quiescence of inflation and slacking global activity. Asia should have seen this coming.
It amounts to a lack of belief. Not just that the Fed could have executed such a volte-face in the first three months of the year, but that the new stance has staying power. Also present is a notion that someone or something will come along to salvage the expansion. Either the U.S. picks up, or China does. Or both.
For Bank Indonesia, the current-account deficit looms large. While the most hawkish language has disappeared from the central bank’s commentary, there’s been a reluctance to publicly countenance the prospect of easing. “Stability” is the term most used by BI folks, or a desire to avoid “instability.”
For countries with sizeable current-account deficits, the prospect of currencies weakening significantly is always a concern. In Indonesia, it goes beyond higher import costs. Memories of 1997-1998 are seared into the current crop of top officials. The Asian financial crisis brought economic and political collapse. Today’s circumstances don’t compare, but history does provide some context for hypersensitivity to the rupiah’s fluctuations.
In the Philippines, things are more encouraging. New central bank
Governor Benjamin Diokno paints himself as a man of action, keen to take advantage of inflation’s retreat to cut the economy
some slack. In Malaysia, inflation is disappearing as an issue — in fact, authorities need to watch the reverse doesn’t come to pass. Consumer prices declined there in January for the first time since 2009. While a dip into the negative zone is probably a monthly blip, the broad trend isn’t.
A growing number of observers foresee rate cuts across the region in a few months. That’s great. We were headed that way since the Fed began its dovish tilt in January and global activity faltered. Why are we still talking about it almost two months later, rather than doing it?I’m all for prudence, especially in monetary policy. If there’s a price for moving too late, I pray it won’t be steep.