Fed de­ci­sion sig­nals long cy­cle of fall­ing in­ter­est rates in re­gion may be over

New Straits Times - - Business -

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


United States Fed­eral Re­serve (Fed) chair­man Janet Yellen an­nounc­ing that the Fed has raised its bench­mark in­ter­est rate by 25 ba­sis points in Wash­ing­ton on Wed­nes­day.

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