Economists With Tunnel Vision Fail to Keep Pace With Global CutsEnda Curran
Spare a thought for Amando Tetangco. The Philippine central bank chief, a shooting enthusiast who has likened battling inflation to firing a handgun, has the strongest currency in Asia this year.
It’s not hard to see why. He’s one of the few holdouts not to lower interest rates in a region where central banks have been rushing to cut amid slowing inflation and a weakening in exports to China. South Korea’s central bank became the latest to surprise economists Thursday, when it reduced its benchmark to an all-time low, a day after Thailand moved.
“There is a bit of peer pressure for central banks to match what others are doing in the region,” said Frederic Neumann, co-head of Asian economics research in Hong Kong at HSBC Holdings Plc, whose team had one of the two forecasters to predict correctly the South Korea decision, among 17 surveyed by Bloomberg News.
Among the head-turning policy moves in Asia so far this year: Bank Indonesia cut rates in February for the first time in three years. Not one of 20 economists surveyed by Bloomberg had predicted a change. Reserve Bank of India Governor Raghuram Rajan has pared rates twice this year in unscheduled moves and the Monetary Authority of Singapore sent traders scrambling on Jan. 28, when it eased weeks before its semiannual policy gathering.
“The market has been surprised by the strange inconsistency in pre-policy communication,” said Jahangir Aziz, JPMorgan Chase & Co. chief Asia economist in Singapore.
Australia, Japan and China are among those now projected to step up their stimulus efforts to shore up their economies amid diminishing inflation pressures.
In Manila, Bangko Sentral ng Pilipinas hasn’t cut largely because growth is holding up, consumers are spending and interest rates are already low. The next scheduled meeting is on March 26.
“They don’t really have to cut interest rates because credit growth is very strong and inflation has decelerated but it is not at risk of falling into deflation,” said Neumann at HSBC.
Malaysia is another hold-out, where policy makers are juggling the prospect of weakening growth while grappling with a faltering currency, the ringgit. Bank Negara Malaysia has held its overnight policy rate at 3.25 percent since July, when it raised the benchmark.
The biggest drag for Asian economies has been China, the engine of expansion for years. The nation’s leaders last week set their lowest growth target in more than 15 years, in aiming for a pace of about 7 percent this year, down from last year’s target of about 7.5 percent. That slowdown is rippling through the rest of Asia.
“There is pressure on exporters and central banks are responding,” said Robert Subbaraman, chief economist for Asia excluding Japan at Nomura Holdings Inc. in Singapore. “I am bit surprised that it has come as a surprise to the market.”
The Thai and South Korean surprises this week came even after unexpected moves by counterparts not only in Asia but around the world, from Switzerland to Canada. The No. 2 official at the Reserve Bank of Australia, which surprised forecasters with a rate reduction last month, alluded to the pressure posed by counterparts.
Deputy Governor Philip Lowe said on March 5 that the country’s higher exchange rate and lower interest rates aren’t at levels that the economy warrants but are unavoidable given the actions elsewhere.
Reserve Bank of India Governor Rajan also suggested a need to keep up with others, citing a strong rupee relative to peers.
“Safety in numbers and the global context of the waves of central bank easing around the world means no-one wants to stand out as a strong carry-trade opportunity,” said David Mann, head of macro research Asia at Standard Chartered Bank in Singapore, referring to the tactic of borrowing in a currency with cheaper rates and investing in a higher-yielding one.
Policy makers also face pressure from exporters and politicians for stimulus -- calls that may carry greater weight when other countries are taking action. Lawmakers in India and South Korea were among those signaling that their central banks ought to bring down borrowing costs.
Hours before South Korea’s announcement, the Chosun Ilbo, South Korea’s most widely read newspaper, cited an internal government report in an article saying that if the benchmark were cut to 1.5 percent in the first half of this year, economic growth could be boosted to 3.8 percent.
The Bank of Korea lowered the seven-day repurchase rate to 1.75 percent. Domestic demand has fallen “substantially” and policy shifts in major countries pose risks for Asia’s fourth-largest economy, according to Thursday’s statement by the central bank.
“We listen to what policy makers are telling us and policy makers and central bankers have not prepared the market for interest-rate reductions,” said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong.
Among those applauding Thailand’s rate cut was Thai Union Frozen Products Pcl, the world’s biggest tuna canner, which said a weaker currency would help support overseas sales.
The move was “absolutely good news to exporters, including us,” Thiraphong Chansiri, the company’s president, said in an e-mailed response to questions. The baht weakened to a two-month low versus the dollar on Wednesday after the quarter point rate cut that was predicted by just six of the 22 analysts surveyed by Bloomberg.
The cycle may yet run its course. Should the Federal Reserve raise interest rates as anticipated by economists mid-year, central banks in Asia face the risk of capital outflows. In that environment, they may calculate that risks outweigh advantages of lowering borrowing costs.
“It is very hard to imagine these banks cutting rates in the face of Fed hiking rates,” said JPMorgan’s Aziz.
Zhou Xiaochuan, governor of the People’s Bank of China, played the down risks from a potential interest-rate increase from the Fed this year when he spoke at a rare press conference on Thursday.