Fed rate moves could spell end to Asian
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[March 16, 2017]
By Vidya Ranganathan
SINGAPORE (Reuters) - The long cycle of
falling interest rates in Asia could be over after the U.S. Federal
Reserve's 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 signaled again that such reticence is over, repeating its
projections for at least two more rate rises this year as the U.S.
economy strengthens. (For a graphic on Fed's target rate and future
projections click http://tmsnrt.rs/1PbXyzs)
"At the very least, the Fed's desire to step up the pace of policy
normalization 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 promptly raised the rates on the short-term
funding operations it conducts for the country's banks for a third time
this year on Thursday.
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 on Thursday, opting to stand pat with its 0.1 percent short-term
interest rate target and a loose commitment to keep buying bonds, though
core inflation is far below its ambitious 2 percent target. (For a
graphic on Asian central bank policy rates click
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
later in the day as central banks in Indonesia, Norway, Switzerland and
Britain review policy.
THE CURRENCY CHALLENGE
The Fed's new policy path is a sea change for global markets used to a
decade of easy money. And 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.
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 developed world rates were at rock bottom.
And they also need to prevent their currencies from tumbling against a
"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. "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.
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A police officer keeps watch in front of the U.S. Federal Reserve
building in Washington, DC, U.S., October 12, 2016. REUTERS/Kevin
"To the extent that U.S. rate hikes do put pressure on Asian central
banks to tighten policy, it will be through currency movements,"
Gareth Leather, senior Asia economist at Capital Economics, said in
Emerging markets have already had a dress rehearsal for such
circumstances in 2013, when the threat of Fed policy tightening
triggered a "taper tantrum" of volatility, prompting central banks
in India, Indonesia and elsewhere to defend their currencies via
South Korea is also juggling competing pressures. Its policy rates
are barely above the Fed's, it wants to avoid unsettling a highly
indebted housing sector, but it also has a huge amount of foreign
money in its bond market that could take off for greener pastures.
The Fed's raise was not the only piece of news that could encourage
the world's central banks to a firmer stance.
Elections in the Netherlands, where the anti-EU party of Geert
Wilders won fewer seats than expected, came as a relief to markets,
though next month's presidential election in France is still hanging
over the continent, with the far-right Front National candidate
Marine Le Pen showing strongly.
For Switzerland, uncertainty has the opposite effect on its
safe-haven currency, driving it higher despite negative interest
The Swiss National Bank is not expected to change its rates later in
the day. Its negative rate policy, in place since 2015, is aimed at
curbing demand for the currency in a period of destabilizing
elections across Europe that could boost anti-establishment parties.
The Norwegian central bank, while keen to start raising rates, is
likely to keep rates on hold, too, after a tumble in inflation as it
worries about a strong currency.
The dilemma for the world's central banks is that markets driven by
the Fed's lead will force them to respond, regardless of domestic
Callow at Westpac said the domestic logic, "in any country or zone
where wages growth is weak and core inflation not on a clear
self-sustaining uptrend", would otherwise be to ease policy.
"Which is actually most of the world," he said.
(Rreporting by Vidya Ranganathan; Editing by Will Waterman)
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