FED RATE HIKE SPELLS END OF ASIAN EASING?
Fed decision signals long cycle of falling interest rates in region may be over
THE long cycle of falling interest rates in Asia could be over after the United States Federal Reserve’s (Fed) third rate rise in 15 months was followed quickly by monetary tightening in the world’s second-biggest economy, China.
The Fed’s widely anticipated rise of 25 basis points on Wednesday was also only its third since the global financial crisis, having reined in earlier temptations to raise rates out of concern for the impact on fragile emerging economies that still needed looser monetary conditions.
But the Fed signalled again that such reticence was over, repeating its projections for at least two more rate rises this year as the US economy strengthens.
“At the very least, the Fed’s desire to step up the pace of policy normalisation has changed the conversation at many central banks globally,” said Sean Callow, an economist with Westpac in Sydney. “Further monetary easing is now largely seen as only if needed to ‘break the glass’, not a plausible baseline.”
The People’s Bank of China (PBoC) raised the rates yesterday on the short-term funding operations it conducts for the country’s banks for a third time this year.
The Fed’s move would otherwise make it harder for China to stop its currency weakening and arrest a persistent outflow of capital. China also wants to cool a run-up in debt and the risk of a property bubble.
PBoC said markets expected higher borrowing costs and that open-market rate increases did not necessarily equate to interest rate hikes, according to a statement.
With the economy steady, inflation rising and real lending cost going down, financial institutions had strong incentives to expand credit, and housing prices had surged in some cities, it added.
The Bank of Japan (BoJ) yesterday opted to stand pat with its 0.1 per cent short-term interest rate target and a loose commitment to keep buying bonds.
Economists had expected no change in the BoJ’s policy settings as rising global protectionist sentiment and an expected series of US rate hikes overshadow budding signs of recovery in the Japanese economy.
Some analysts expect BoJ will in due course have to raise its zero per cent yield target for 10- year government bonds.
The Fed’s new policy path is a sea change for global markets used to a decade of easy money. While emerging markets are showing some signs of strength, with a recovery in commodity prices and growth in exports, they are struggling to fire up domestic demand.
“Even if domestic conditions warrant a cut, fears about exacerbating financial market volatility will keep central banks cautious,” said Tim Condon, ING’s chief Asia economist. Agencies