Asian rates respond to end of cycle in US
Federal Reserve’s increase leads to monetary tightening by China
THE LONG cycle of falling interest rates in Asia could be over after the US Federal Reserve’s third rate rise in 15 months was followed quickly by monetary tightening in China. The Fed’s widely anticipated rise of 25 basis points on Wednesday was also only its third since the global financial crisis in 2008/09, 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 is 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. Further monetary easing is now largely seen as only if needed to ‘break the glass’, not a plausible baseline,” Sean Callow, an economist with Westpac in Sydney, said.
The People’s Bank of China yesterday raised the rates 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.
The Bank of Japan (BOJ) announced the verdict of its regular policy meeting yesterday, opting to stand pat with its short-term interest rate target of 0.1% and a loose commitment to keep buying bonds, although core inflation is far below its ambitious target of 2%.
Some analysts expect the BOJ will in due course have to raise its zero percent yield target for 10-year Japanese government bonds. Broader evidence of the shift in central bank thinking will be on hand lateras central banks in Indonesia, Norway, Switzerland and Britain review policy.
The Fed’s new policy path is a sea change for global markets used to a decade of easy money.
And although 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.
But their freedom to fit domestic rates to local demand conditions is constrained by the need to keep hold of the foreign capital that flooded in seeking higher yields when rates in the developed world were at rock bottom. They need to prevent their currencies tumbling against a rallying dollar.
“Even if domestic conditions warrant a cut, fears about exacerbating financial market volatility will keep central banks cautious,” Tim Condon, ING’s chief Asia economist, said. “It definitely complicates life for those central banks that either needed to or wanted to cut rates.”
Condon was expecting Indonesia’s central bank to cut rates twice this year, but says he is now “uneasy” about that call.