Fed pause may lead to Asian rate cuts

HONG KONG: The abrupt policy shift last week by the US Federal Reserve 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 moves was pummelling the region’s currencies and pressuring current account deficits.

Now, the focus 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 — met last Thursday and kept policy on hold. If anything, analysts are now watching for any hint of a dovish turn.

“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 in Singapore.

A currency rally is also helping. The Chinese yuan has led gains among emerging Asian currencies this year, strengthening almost 3% against the dollar and followed by the baht. That’s a turnaround from 2018, when only the Thai currency rose.

Global growth is under pressure after a sharp slowdown in 2018, and policymakers are waiting for clarity on issues from trade tariffs to Brexit. But inflation in particular is dominating concerns, with little sign that the post-crisis recovery, extreme monetary stimulus and a decline in unemployment is driving up price pressures.

Bangko Sentral ng Pilipinas last week kept its benchmark rate unchanged at 4.75% and reduced its inflation forecast. New governor Benjamin Diokno is being watched for any hint that he intends to begin reversing 175 basis points of increases in 2018.

Bank Indonesia also left its key rate unchanged at 6%, while investment banks including Goldman Sachs and Morgan Stanley are now pointing to cuts beginning as early as the second quarter. Taiwan’s central bank also kept its benchmark rate at 1.375%.

While China’s economy is forecast to stabilise by midyear, the rest of the region continues to feel its downdraft. South Korean exports are off 4.9% year-on-year so far this month.

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

The Fed’s decision will also play out in developed economies. Norway, where rising oil prices led to a rate hike last week, may be the exception, while the Swiss National Bank and Bank of England have kept their rates on hold.