US Fed's abrupt policy shift invites Asian central banks to cut rates

Illustration by Ajay Mohanty
The Federal Reserve’s abrupt policy shift has opened the door for interest rate cuts across Asia as inflation remains subdued and economic growth slows.

That’s a stark contrast from as recently as four months ago when the prospect of further Fed hikes was pummeling the region’s currencies and pressuring current account deficits.

Now, the focus across the region is shifting to domestic concerns as the primary driver of monetary policy. Central banks in Indonesia and the Philippines -- among the most aggressive rate hikers last year -- kept policy on hold on Thursday, as expected, citing subdued inflation pressures.

"The Fed’s big shift will end the tightening wave for Asia’s central banks and open the door for future easing," said Hak Bin Chua, an economist at Maybank Kim Eng Research Pte in Singapore.

A currency rally is also helping. China’s yuan has led gains among emerging-Asian currencies this year, strengthening almost 3 percent against the dollar and followed by the baht. That’s a turn from 2018, where only the Thai currency rose.

Bank Indonesia kept its key rate unchanged at 6 percent on Thursday, with Governor Perry Warjiyo turning to macro-prudential measures to spur domestic demand and growth. Investment banks including Goldman Sachs Group and Morgan Stanley predict rate cuts beginning as early as the second quarter of the year.

Bangko Sentral ng Pilipinas also kept its benchmark rate unchanged at 4.75 percent, with newly appointed Governor Benjamin Diokno saying prevailing monetary policy settings are appropriate. He has previously signaled a willingness to ease policy after 175 basis points of hikes in 2018.

Taiwan’s central bank followed peers in Southeast Asia by keeping its benchmark rate at 1.375 percent, citing mild economic growth and a stable inflation outlook.

While China’s economy is forecast to stabilize around mid year, the rest of the region continues to feel its downdraft. South Korea’s exports -- a bellwether for global trade -- fell 4.9 percent from a year earlier during the first 20 days of the month, data Thursday showed.

"With a dovish Fed, Asian central banks can now lower real rates," said Trinh Nguyen, senior economist at Natixis Asia Ltd.

The Fed’s decision is also playing out in developed economies. The Swiss National Bank held its key rate on Thursday, while rising oil prices led Norway to hike, as expected. The Bank of England is forecast to remain on hold.

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