China’s Slowdown Puts Asian Central Banks in a Bind as Fed Looms

China’s slowing economy is putting pressure on central banks across Asia to lower interest rates further.

For policy makers, that poses a dilemma. The lower rates go, the sharper the U-turn required if the U.S. Federal Reserve delivers as expected this year its first rate increase since 2006, which could lure funds away from emerging markets.

“The spectrum for further rate cuts across Asia has narrowed but exists nevertheless,” said Alicia Garcia-Herrero, Hong Kong-based chief economist for emerging markets at Banco Bilbao Vizcaya Argentaria SA. “It would be naive not to expect volatility in global financial conditions,” especially across emerging Asia ahead of Fed policy normalization, she said.

The biggest drag on Asia’s economic outlook remains China, where growth in the first quarter slowed to its weakest since 2009. Declining growth has spurred the People’s Bank of China to cut rates and free up cash for lending.

Those moves alone won’t be enough to revive the rest of the region, said Frederic Neumann, co-head of Asian economics research in Hong Kong at HSBC Holdings Plc. Monetary conditions in Asia are tightening amid low regional inflation, with real interest rates rising, leaving scope for central banks to cut borrowing costs, Standard Chartered Plc said in an April 27 note.

Not Over

“The easing cycle across the region isn’t over,” said Neumann. “China can’t do the job for everyone else. Once that becomes clear, expect more rate cuts from Korea to India, and many places in between.”

Among the central banks that some economists say could cut again: Australia, South Korea, Indonesia and China. Japan too, is forecast by a small minority to unleash extra stimulus as its economy struggles to gain traction even after unprecedented monetary policy easing.

Bank of Japan Governor Haruhiko Kuroda has said that record purchases of government debt will succeed in boosting inflation in the world’s third-largest economy. Yet the latest readings on the economy remain unflattering. Retail sales fell in March by the most since 1998, data on Tuesday showed.

Marcel Thieliant at Capital Economics and Yuji Shimanaka at Mitsubishi UFJ Morgan Stanley Securities Co. were the only two economists among 34 respondents in a Bloomberg survey that forecast the BOJ will expand unprecedented monetary easing at this week’s meeting.

Confounding Forecasts

The policy outlook across the region is far from uniform, and central banks have confounded economists’ expectations in recent months. The fall in oil prices and already growth-friendly policy settings mean Asia should outperform the rest of the world, the International Monetary Fund said in its global outlook report earlier this month.

Growth across the Asia and Pacific region will probably stay at 5.6 percent this year, the same pace as 2014, according to the IMF.

And signs of economic improvement are emerging. South Korea’s central bank Governor Lee Ju Yeol -- who unexpectedly cut rates in March -- said on Tuesday in Seoul the economy is showing positive signals such as improved consumer sentiment, housing and property markets, even as the recovery remains weak.

Thailand’s central bank is forecast to hold its benchmark rate steady at Wednesday’s policy decision, after a surprise easing last month. The Reserve Bank of New Zealand is also tipped to stand pat when it meets on Thursday.

“Within the next month or two we will see the last cuts in the majority of countries,” said Daniel Martin, an economist at Capital Economics Ltd. “Central banks will realize that towards the end of the year inflation will start to rise again and most of them will turn their attention to hiking.”

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