Concerted monetary stimulus by central banks from China to Europe has reinforced the pressure for Asian policy makers to act as faltering global growth undermines demand for the region’s exports.
South Korea, due to decide on its benchmark interest rate next week, has a growing case to cut borrowing costs, according to Mizuho Corporate Bank Ltd. and ING Groep NV. Singapore, Malaysia, Australia, Thailand and India all have room to ease policy, said Vishnu Varathan, an economist at Mizuho.
The European Central Bank and People’s Bank of China cut their benchmark borrowing costs yesterday while the Bank of England raised the size of its asset-purchase measure, two weeks after the U.S. Federal Reserve expanded a program lengthening the maturity of bonds it holds. Asian stocks fell today as the gathering pace of stimulus moves underscored the weakness in the world’s biggest economies, raising concern the policy easing won’t be enough to boost growth.
“What it does is it gives policy makers a lot more reason to protect their economies from downside risks,” said Singapore-based Varathan. “It looks like the pressure to ease policy in Asia will grow because a lot of those shocks will translate through the trade channel. We’ve already seen some of that coming through, we’ll probably see more of it.”
The Bank of Japan, Bank of Korea and Bank Indonesia are all due to release monetary policy decisions on July 12, a day after Sri Lanka. While five of six economists surveyed by Bloomberg News expect South Korea to hold rates this month, yesterday’s rate cuts in China and Europe have strengthened the case for a quarter-point reduction in Korean borrowing costs next week, said Prakash Sakpal, an economist at ING in Singapore.
The Bank of Korea kept its key rate unchanged at 3.25 percent for a 12th month in June, noting elevated inflation expectations and increasing downside risk due to the situation in Europe. The country may lower borrowing costs in the second half of the year as its export-dependent economy is vulnerable to weakening global demand and inflation has eased, said Stephen Schwartz, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong.
“The weaker the external environment is, the more likely other countries may follow suit” after yesterday’s easing, said Schwartz, who also expects more rate cuts in Australia and India this year. China’s move is “a reminder of the challenges on the growth side the region faces,” he said.
Forecasts for the Bank of Japan meeting next week are mixed, with RBS Securities saying odds are growing for the BOJ to refrain from adding stimulus while Mizuho Securities sees the possibility of further easing. Governor Masaaki Shirakawa’s board will also review their outlook for prices and growth for fiscal 2012 and 2013.
China, the ECB and England announced their stimulus measures in a span of 45 minutes yesterday. The People’s Bank of China cut rates for the second time in a month, saying the one-year lending rate will fall by 31 basis points to 6 percent effective today, and lenders can offer loans at as much as 30 percent less than the benchmark.
The ECB cut its main rate by 25 basis points to a record low of 0.75 percent and said it will no longer pay anything on overnight deposits as Europe’s sovereign-debt turmoil threatens to drive the 17-nation euro economy into recession. Bank of England Governor Mervyn King and colleagues raised their asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds in a bid to pull the economy from recession.
The MSCI Asia Pacific Index slid 0.7 percent at 1:30 p.m. in Tokyo. Crude oil was down 1.2 percent in New York as of 12:42 p.m. in Singapore. China’s stocks fell for a third day, led by banks and energy producers, as the rate cut intensified concern that the economic slowdown is deepening.
Elsewhere in the Asia-Pacific region, Australia’s construction industry contracted in June, according to a survey by the Australian Industry Group and the Housing Industry Association. Japan’s leading index rose to 95.9 in May, a report showed today.
Spain will probably say industrial production fell for the ninth straight month while France’s trade deficit probably narrowed in May, according to separate Bloomberg surveys. Germany will announce industrial production numbers for May.
Employers in the U.S. probably increased nonfarm payrolls by 100,000 workers last month after a 69,000 gain in May, according to the median forecast of 84 economists surveyed by Bloomberg News ahead of figures due today. The government will also report the unemployment rate for June.
“It’s clear that the troubles in Europe are a lot more acute and probably justify more aggressive easing,” said Chua Hak Bin, a Singapore-based economist at Bank of America Corp. “We are looking for further easing in the second half of the year from India as well as Korea. We’re also looking for further reserve requirement cuts for China. Most of the other central banks in Asia have room to ease but I think will only pull the trigger in the event of a catastrophe.”
Indonesia may opt for other measures to support growth as a declining currency prevents Southeast Asia’s largest economy from cutting rates, said Varathan. The central bank may hold its benchmark at 5.75 percent next week, according to all 15 economists surveyed by Bloomberg News. The Central Bank of Sri Lanka may also keep borrowing costs unchanged, a separate survey showed, as inflation accelerated to a 14-month high.
Pressure for stimulus in Asia may ease should China’s efforts to bolster the world’s second-largest economy bear fruit, said Frederic Neumann, Hong Kong-based co-head of Asian economic research at HSBC Holdings Plc.
“We’re still pretty comfortable other central banks will not necessarily follow China,” he said. “The growth outlook is more robust in small economies, and interest rates are already low. The more forceful the stimulus is in China, the more lifting China does, the less smaller economies have to contribute at the end of the day.”