Goldman Says Asia Won't Lift Rates as Currencies Drop

  • Below-target inflation makes borrowing-cost increases unlikely
  • Malaysian ringgit's 11% slump was most in the region this year

Favorable economic and international trade conditions in most Asian countries makes it unlikely that the region’s central banks will deem it necessary to raise interest rates to offset the impact of weaker currencies, according to Goldman Sachs Group Inc.

While most Asian currencies have depreciated this year, policy makers don’t need to increase borrowing costs in the short term because inflation levels in several nations remain “comfortable,” and risks in trade and foreign debt payments are limited, Goldman analyst Fiona Lake wrote in a research note Thursday.

“Asia has limited external vulnerabilities, suggesting limited financial stability risks,” Hong Kong-based Lake wrote. The region’s “benign inflation backdrop has room to absorb any pass-through from currency weakness and also argue for policy rates to remain low,” she wrote.

Currencies Slump

Eleven of 12 Asian currencies tracked by Bloomberg have declined against the U.S. dollar this year. The Malaysian ringgit is the worst performer, slumping 11 percent. Indonesia’s rupiah has weakened 8.4 percent. The South Korean won has fallen 6.4 percent.

With the exception of Indonesia and India, Asia has “well anchored” expectations for inflation, which makes the region less likely to be affected by currency weakness, Lake said. Lower commodity prices also will help control inflation, she said.

On the trade side, most nations will report surpluses and the adequacy of their foreign-currency reserves will help cover their external debt, according to the analyst. Indonesia, which has a current-account deficit, is “the most vulnerable” with regards to the capacity of its currency reserves, she said.

India and South Korea last cut their benchmark interest rates in June. Indonesia, Thailand, Pakistan and Sri Lanka also lowered interest rates this year. China, the region’s largest economy, has decreased rates three times in 2015 to help revive its economic growth.

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