Central Banks Take the Wheel to Manage Growth Across Asia ex Japan

Paul Hsiao

5 September 2019

One of the key economic trends we’ve observed this year in the Asia ex Japan region is the synchronous lowering of policy rates from a broad range of central banks. That’s in contrast to a series of rate tightenings last year as policymakers battled currency depreciation and fears of inflation. This year, uncertainty stemming from a more protectionist trade environment combined with a dovish turn from the US Federal Reserve and European Central Bank have prompted most major central banks in the region to cut interest rates and spur domestic growth.

This year it’s different

India’s once-stellar GDP growth rate fell to 5.8%, a five-year low, in the first quarter of the fiscal year, largely induced by domestic factors – namely, a banking system saddled with bad debts and declining investments. Since the start of the year, the Reserve Bank of India has lowered its repurchase rate by more than 100 basis points (bps). The first cuts were likely aimed at reversing the currency-stabilizing hikes implemented in 2018, while the next cuts were likely undertaken to boost domestic demand amid a slowdown in yearly CPI growth. With tensions ratcheting up again with rival Pakistan, we expect the bank to cut rates as much as another 50 bps by year’s end.

Meanwhile, the Bank of Indonesia has cut rates twice (by 50 bps altogether) this year as a “pre-emptive measure” to boost Southeast Asia’s largest economy amid weaker export-commodity prices. Last year, the bank raised rates by 175 bps. With headline yearly CPI growth remaining modest, the bank has room to ease further by another 25 bps next year and 50 bps more in 2020, barring sudden currency weakness.

Asia’s Central Banks Look to Pre-empt the Fed

Asia's Central Banks Look to Pre-empt the Fed

Source: Macrobond, Bloomberg, PineBridge Investments. Calculations as of 19 August 2019.

China: All other means but a rate cut

As the US and China continue their tit-for-tat tariff moves, it’s hard to disentangle the effects of the trade war from the cyclical weakness in China’s economy. But one thing is clear: Third-quarter data reporting is on much softer footing. Yearly real GDP growth in China averaged around 6.3% during the first half, a pace that will likely come down closer to 6% during the second half.

For policymakers, these numbers make the case for a greater stimulus push, especially if the higher tariff rates from the US come into effect. But the People’s Bank of China (PBOC) has resisted the urge to decrease its benchmark policy rates over the past few years. Instead, it has opted to cut reserve rate requirements as well as implement fiscal policy on the margins as a means to increase liquidity in the financial system. One of the reasons is the bank’s current revamp of China’s interest rate framework to eventually replace the benchmark rate with the “loan prime rate” (LPR), or a bank’s offer to its best clients.

However, given trade uncertainties, we believe the case to expand the PBOC’s stimulus has increased over the last several months, which could prompt a cut to China’s benchmark rate by year’s end. When a trade deal will be reached is unknown, but one thing we can expect with conviction: the yuan to trade above the 7.0 level against the US dollar until tensions ease.

In Hong Kong, the city’s financial secretary warned it could plunge into a technical recession as widespread protests and the trade war put downward pressure on the economy. Hong Kong’s monetary policy mirrors the Fed’s because of the currency peg, so more fiscal easing measures are likely should the economy continue to contract.

Scope for more easing

Unlike their European and Japanese counterparts, Asian central banks do have room to further deploy monetary stimulus should growth continue to disappoint. South Korea, tangled in the US-China trade war as a component supplier to China and caught in its own dispute with Japan, has lowered growth expectations and noted the many risks to its forecasts. This should set up a rate cut before year’s end.

The Philippines, which also reversed rate hikes last year, could see at least one more rate cut by the year’s end because inflation remains below target. And like other economies in the region, Thailand’s real GDP growth is slowing, and inflation is trending below the midpoint of the central bank’s 0%-3.5% target band. This year, the bank cut rates by 25 bps to 1.75%, reversing the rate hike it implemented at the end of 2018. Likewise, we see the bank possibly dropping rates another 25 bps by year’s end.

What’s next depends on the Fed

While many of these central banks have more room to cut rates if need be, policy rates in Asia are already trending among the lowest in history. The phenomenon isn’t unique to Asia. One only has to look at the negative rates in Europe and historically low levels in the US to see that the banks in Asia have plenty of company. Much of the future trajectory of policy rates depends on what the Fed does next. If the market is right and the US central bank cuts rates by about 100 bps over the next 12 months, it’s a good bet that Asian central banks will follow. As rates go lower and lower, more attention may turn to fiscal stimulus plans as a potential catalyst for growth in the coming quarters.


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