Powell’s Pause Leaves Door Half Shut for Asia Central Banks

(Bloomberg) --

Jerome Powell has just complicated the outlook for Asia’s central banks.

By signaling that that U.S. monetary policy is on pause after three interest rate cuts, the Federal Reserve Chairman has narrowed the options for emerging economy central banks to ease too.

Monetary authorities across Asia have followed the Fed’s dovish tilt this year in aggressively lowering borrowing costs as growth slows. India, Indonesia, Philippines, Malaysia, South Korea and Thailand are among those that have cut benchmark rates.

Those cuts have helped support demand in what remains the world’s fastest-growing region.

A Fed easing cycle typically creates room for emerging economy central banks to cut rates, without triggering a run on their currencies or capital markets. While Asian central banks still could ease, their room for maneuver will depend on how markets play out and how long the Fed stays on hold.

“A Fed pause will not completely close the door on Asia rate cuts, which will more likely be driven by individual country conditions,” said Chua Hak Bin, an economist at Maybank Kim Eng Research Pte Ltd. in Singapore.

At the same time, the Fed’s hawkish cut signals confidence that the world’s biggest economy is headed for a smooth landing. That will buoy sentiment for emerging economies and lessen the need for policy support.

“This positive mood should support risk assets as we approach the end of 2019, including Asian equities with high export exposure,” according to Tai Hui, Asia chief market strategist at JP Morgan Asset Management Inc.

©2019 Bloomberg L.P.