Asia’s Big Chance, Courtesy of the Fed
(Bloomberg Opinion) -- Federal Reserve officials handed their Asian colleagues a gift. They just need to accept it.
The abrupt halt to Fed tightening and even the prospect of an interest-rate cut opens a huge window of opportunity. Central banks across emerging markets, and Asia in particular, have scope to reset their policy frameworks. In a region where activity is faltering, reductions are suddenly on the menu.
It was seen as a big shift when Indonesia just a few weeks ago, followed by South Korea, proclaimed they had switched to hold, in no small part because of the Fed. That these statements now look dated is a measure of the velocity with which the global monetary playbook is being rewritten.
If your role model changes, you can too. Banks in Asia must now be actively considering cuts, and pretty soon. If you can go up, courtesy of the Fed, feel free to dial down as well.
Local factors are obviously important as few countries fit a template perfectly. Don't let that obscure the broader trend: a tilt toward global easing. Central banks large and small are no longer fighting each other.
The message wasn't lost on the Bank of Korea, which Jan. 24 fended off questions about a rate cut despite a deteriorating economy. That was so last week! The U.S. central bank’s pivot Wednesday “is expected to help stabilize the financial market, and the Fed's changes will affect South Korea's future monetary policy” as well as that of many other countries, Bank of Korea Governor Lee Ju-yeol told reporters, according to Yonhap.
That BOK hike in November is starting to look less like an innocuous one-off and more like a mistake. The rally in South Korean bonds suggests investors expect it to be corrected soon.
No discussion about Asian monetary policy and responsiveness to the Fed is complete without Indonesia. The central bank’s six rate hikes to support the rupiah as the Fed raised must be ripe for the picking. It's the logical follow from Governor Perry Warjiyo’s description of his stance as “hawkish, pre-emptive and forward-looking” when Bank Indonesia left the key rate at 6 percent a few weeks ago. Another Fed increase in March had been priced in when Indonesia raised in November, Warjiyo said.
Pre-emptive and forward-looking would be a great way to explain slicing borrowing costs. Driven in large part by a weakening picture in China, most economies in Asia face a tougher outlook. The Fed's volte-face also gives Warjiyo and his peers a chance to align policy more with Asia's largest economy than with the clout of the greenback.
Even in Australia, whose three-decade expansion has become the stuff of folklore, assumptions are being rethought. The Reserve Bank of Australia's two years of rate stasis were long considered a prelude to an increase. That notion is getting a second look. A first step could be shifting the RBA's stance formally to neutral when policy makers meet next week.
The big kid on the block is China. Authorities are clearly in easing mode, both fiscal and monetary. Until now, the People's Bank of China has refrained from lowering the benchmark lending rate. That abstinence probably won't last, says Barclays Plc. Economists at the firm wrote today that they are on alert for a cut in coming weeks, “possibly as early as around Feb. 1.”
Whether such a move would have significant practical impact is the subject of intense debate, given the structure of China's financial system. The symbolic significance would hard to miss.
And fitting, given the principal vulnerability in the region if not the world is, well, China.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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