Yuan’s Slump Puts Asia’s Rate-Cutting Central Banks on Alert
Yuan’s Slump Puts Asia's Rate-Cutting Central Banks on Alert
(Bloomberg) -- China’s decision to weaken its currency amid an escalating trade war will put Asian central banks on the defensive as they gauge how much monetary-policy easing their economies can withstand.
The market turmoil may give Asian policy makers reason to pause just as the Federal Reserve’s rate cut last week gave them space to pursue looser policy. New Zealand, India and the Philippines are still likely to proceed with their rate cuts this week, but future policy action across the region will become more uncertain.
“It is obvious that this move makes it harder for regional monetary authorities to lower their interest rates,” said Toru Nishihama, emerging-market economist at Dai-ichi Life Research Institute Inc. in Tokyo. “The regional central banks have to be more cautious across Asia as a rate cut under this environment would add to downward pressure on their currency.”
Here’s how Asian officials have responded so far to China’s move and what analysts are watching out for:
South Korea
South Korea is mired in its own tit-for-tat trade tensions with Japan, and is one of the most exposed economies to China’s export woes, complicating the Bank of Korea’s job. The three-year bond yield fell to a record low on Monday as traders speculated the central bank could cut rates faster than currently projected. But currency fluctuations, limited policy space and high consumer debt levels may keep policy makers on guard.
“They don’t really have a lot of room, so I think they’ll continue to monitor how things play out before deciding” on further interest-rate cuts, Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore, said of the weakening yuan’s impact on the Bank of Korea. “This is going to be the balancing act that central banks in the region will need to weigh out.”
South Korea’s won breached the key 1,200 support level on Monday, with the foreign exchange authority calling the currency’s moves “excessive” and “abnormal.”
Indonesia
After spending much of 2018 beholden to a weakening rupiah that prompted 175 basis points of rate hikes, Bank Indonesia now faces a tougher decision as it unwinds some of that tightening. The result could be a slower pace of rate cuts than in past cycles.
The central bank said it will intervene in currency markets to ensure the rupiah trades in line with its fundamentals. “Potential risks, from any source, are calculated by BI and will be considered in the formulation of the policy mix,” Deputy Governor Dody Budi Waluyo said via text message.
The latest escalation in trade tensions “validates our view that its rate-cutting cycle will be more calibrated than in the past as Bank Indonesia navigates and treads these external risks cautiously,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. He said a second rate cut from Bank Indonesia this month after last month’s easing “is unlikely.”
Philippines
Economists are sticking to their calls for a rate cut by Bangko Sentral ng Pilipinas Thursday despite the peso’s depreciation against the dollar following the PBOC’s move. Policy makers are more likely to remain focused on slowing inflation and weaker economic growth, said Nicholas Mapa, a senior economist at ING in Manila.
Governor Benjamin Diokno remains dovish, saying he sees 50 basis points of easing for the rest of the year. The timing of the rate cuts will depend on incoming economic data, he said.
Thailand
The Bank of Thailand has been struggling to contain a surge in the baht, seen as a safe haven currency among emerging markets. The central bank has already taken steps to curb the currency, while remaining hesitant to cut rates for now. Just two of 27 economists in the Bloomberg survey ahead of Wednesday’s decision predict a cut.
The central bank should “take care” of baht strength, Industry Minister Suriya Juangroongruangkit said Monday at a conference in Bangkok, noting that the currency’s rise has been hurting competitiveness.
Japan
A stronger yen will further frustrate Bank of Japan Governor Haruhiko Kuroda’s already tough job of stoking inflation by lowering import prices and cutting into corporate profits. Kuroda last week pledged to act before any risks to the 2% inflation target materialize, but many BOJ watchers are skeptical the central bank has sufficient firepower left after more than six years of extraordinary monetary stimulus.
--With assistance from Thomas Kutty Abraham, Suttinee Yuvejwattana, Henry Hoenig, Ditas Lopez and Karl Lester M. Yap.
To contact the reporters on this story: Michelle Jamrisko in Singapore at mjamrisko@bloomberg.net;Yumi Teso in Bangkok at yteso1@bloomberg.net;Karlis Salna in Jakarta at ksalna@bloomberg.net
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke
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