The People’s Bank Of China (PBOC) headquarters stand at night in the financial district of Beijing, China (Photographer: Tomohiro Ohsumi/Bloomberg)  

Central Banking Is About to Get More Interesting in Asia

(Bloomberg View) -- A period of tranquility in Asian central banking appears to be ending, and that's not a bad thing.

India and Indonesia are probably done cutting interest rates. Their next steps are likely to be hikes, with the Philippines following suit. While these nations' central banks are minnows relative to the Bank of Japan and People's Bank of China, their rate decisions would show that emerging-market policymakers expect their economies to heat up after a long period of calm.

That calm, enabled by very low inflation globally and the Federal Reserve's gradual approach to raising U.S. rates, meant that emerging-market central banks could pretty much do as they pleased. That was a huge shift from past economic cycles when a tightening Fed meant that the smaller cousins had to follow suit, lest a widening difference between respective interest rates weaken their currencies. Things are now beginning to turn.

As U.S. inflation appears to have bottomed and the Fed forges ahead, some of the calculus is changing in subtle but important ways. Borrowing costs worldwide will still be low for an eighth year of global economic expansion. They just won't be as low as they were.

Let's look first at Indonesia, where things are looking worrisome for incoming Bank Indonesia Governor Perry Warjiyo, who moves up from the number two spot in May. As my Bloomberg Markets colleagues Karlis Salna and Tassia Sipahutar note in their profile of Warjiyo, he learned valuable skills fighting the 1997-98 Asian financial crisis.

Bank Indonesia cut rates eight times since 2006 and, to be fair, inflation was pretty well contained. The rupiah was down a bit, but nothing too dramatic. Lately, it's started to drop some more and has shed 2.6 percent against the dollar this year. That doesn't sound alarming, but it's the worst performing emerging-market currency in the past month after the Hungarian forint.

More troublingly, the central bank tapped reserves last month to cushion what would have been a greater decline. That's a dangerous game; spending too much of the rainy day fund to fight the market isn't a winning long-term strategy. At least some of those eight rate cuts now look like mistakes.

India's interest-rate snip last year looks cheeky. Judging by minutes of the Reserve Bank of India's Feb. 6-7 meeting, a nudge upward from the current benchmark of 6 percent looks almost certain. While policy was unchanged at that meeting, one of the six officials who decide rates turned hawkish and another abandoned his preference for easing.

Policymakers are concerned about inflation resulting from Prime Minister Narendra Modi’s expansionary budget. They might also fret about an upswing in food prices; for now, retreating food costs are keeping a lid on overall price rises.

Local factors clearly still matter in the world's largest democracy and Southeast Asia's largest economy. The Fed hasn't yet shifted to aggressive moves to slow the U.S. economy; it still frames things in terms of reversing unusual growth-stimulating policies put in place during the financial crisis. But the direction is becoming clear.

Emerging markets have been cut a lot of slack. Time to reel some in, at least in Asia.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

To contact the author of this story: Daniel Moss at dmoss@bloomberg.net.

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