Concerted monetary stimulus by central banks from China to Europe has reinforced the pressure for Asian policymakers to act as faltering global growth undermines demand for the region’s exports.
South Korea, due to decide on its benchmark interest rate next week, has a growing case to cut borrowing costs, according to Mizuho Corporate Bank Ltd and ING Group NV. Singapore, Malaysia, Australia, Thailand and India all have room to ease policy, Singapore-based Mizuho economist Vishnu Varathan said.
The European Central Bank (ECB) and the People’s Bank of China cut their benchmark borrowing costs on Thursday, while the Bank of England raised the size of its asset-purchase measure, two weeks after the US Federal Reserve expanded a program lengthening the maturity of bonds it holds. Asian stocks fell yesterday as the gathering pace of stimulus moves underscored the weakness in the world’s biggest economies, raising concern the policy easing will not be enough to boost growth.
“What it does is it gives policymakers a lot more reason to protect their economies from downside risks,” Varathan said. “It looks like the pressure to ease policy in Asia will grow because a lot of those shocks will translate through the trade channel. We’ve already seen some of that coming through, we’ll probably see more of it.”
The Bank of Japan (BOJ), Bank of Korea and Bank Indonesia are all due to release monetary policy decisions on Thursday next week, a day after Sri Lanka. While five of six economists surveyed by Bloomberg News expect South Korea to hold rates this month, Thursday’s rate cuts in China and Europe have strengthened the case for a quarter-point reduction in South Korean borrowing costs next week, Singapore-based ING economist Prakash Sakpal said.
The Bank of Korea kept its key rate unchanged at 3.25 percent for a 12th month last month, on elevated inflation expectations and increasing downside risk due to the situation in Europe. The country may lower borrowing costs in the second half of the year as its export-dependent economy is vulnerable to weakening global demand and inflation has eased, said Stephen Schwartz. Hong Kong-based Banco Bilbao Vizcaya Argentaria SA’s chief economist for Asia.
“The weaker the external environment is, the more likely other countries may follow suit” after Thursday’s easing, said Schwartz, who also expects more rate cuts in Australia and India this year. China’s move is “a reminder of the challenges on the growth side the region faces,” he said.
Forecasts for the BOJ meeting next week are mixed, with RBS Securities saying odds are growing for the BOJ to refrain from adding stimulus, while Mizuho Securities sees the possibility of further easing. China, the ECB and England announced their stimulus measures in a span of 45 minutes on Thursday. The People’s Bank of China cut rates for the second time in a month, saying the one-year lending rate will fall by 31 basis points to 6 percent effective yesterday, and lenders can offer loans at as much as 30 percent less than the benchmark.
The ECB cut its main rate by 25 basis points to a record low of 0.75 percent and said it would no longer pay anything on overnight deposits as Europe’s sovereign-debt turmoil threatens to drive the 17-nation euro economy into recession. Bank of England Governor Mervyn King and colleagues raised their asset-purchase target by ￡50 billion (US$78 billion) to ￡375 billion in a bid to pull the economy from recession.