Asian nations from India to Australia may cut interest rates to buffer their economies from a decline in trade and consumer spending likely to result from a war in Iraq, investors said.
Cutting borrowing costs will be the quickest way to protect Asian economies already reeling from rising oil prices and a drop in exports to the US, where retail sales last month fell by the most since November 2001, they said. Spending increases and tax cuts may come later.
"Monetary policy will be the primary tool used to mitigate the risk of war," said Edwin Chungunco, who helps manage US$800 million at Citigroup Asset Management Ltd in Singapore.
With inflation under control in much of Asia, central banks still have room to cut rates, already the lowest in decades in many countries. The Reserve Bank of Australia's overnight cash rate of 4.75 percent is a half-point above a 30-year low. The Reserve Bank of India's bank rate is at a 29-year low of 6.25 percent.
With the exception of Japan, where rates are near zero, interest-rate cuts "should be the first line of defense" for the region, said David Burton, director of the International Monetary Fund's Asia and Pacific department. Growth in Asia outside Japan was twice the world average at 6 percent last year.
That doesn't mean Asian countries won't also spend more.
"It will be probably a mix of the two, depending on the country and the ability to absorb more fiscal spending," said James Blair, who helps manage US$1 billion of Asian bonds at Aberdeen Asset Management Ltd in Singapore.
The region's central banks will probably take their cue from US Federal Reserve policy-makers, who meet next week. The US, Asia's biggest export market, lost 308,000 jobs in February, a report last week showed.
While 26 of 32 economists surveyed by Bloomberg News expect the Fed to keep its benchmark rate unchanged at 1.25 percent -- the lowest since 1961 -- that could change if reports show more economic weakness, analysts said.
A reduction by the Fed "would build up expectations of a cut in the bank rate in India," said A. Balasubramaniam, who helps manage 58 billion rupees (US$1.2 billion) of Indian debt at Birla Sun Life Asset Management Co. He said India's bank rate could be cut by a quarter-point next month.
The prospect of a war is already taking a toll. Australian consumer confidence fell to its lowest in almost two years in March, and Japanese exports fell for a second month in January, reports this week showed. South Korea last week cut its growth forecast for this year.
"If a war starts, we will suffer and sales will slump," said Gerry Harvey, chairman of Harvey Norman Holdings, Australia's third-biggest retailer by market value.
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