Asia eyes rate-cut window before Fed shift

[SINGAPORE] Get those interest-rate cuts in now. That's what some Asian policymakers may be thinking as the Federal Reserve prepares to end its six-year, zero-rate policy - a move that risks spurring capital flight from emerging markets.

Singapore on Wednesday eased policy, jumping the gun ahead of its scheduled April meeting. While Thailand kept its benchmark rate unchanged the same day, market pricing indicates some investors see the central bank pulling the trigger in coming months. India is also projected to cut rates further.

What's aiding the case for reducing rates now to bolster growth is the slide in oil that's pulling down inflation rates across the globe. The dynamic for emerging markets may shift later this year should the Fed boost borrowing costs, undermining demand for Asian currencies.

"The window for easing is closing pretty soon for many of these Asian economies, so it should be within the next couple of months," said Santitarn Sathirathai, Singapore-based economist for Southeast Asia and India at Credit Suisse Group.

"They probably don't want to make a move around the Fed. If they're going to do it they're going to do it earlier and then just hold it out during the Fed interest-rate increase."

India's one-year interest-rate swaps slid to an almost 19- month low this week on speculation the central bank will add to this month's surprise rate cut as plunging oil prices keep inflation in check. South Korea's interest-rate swaps are dropping because central banks are easing in the current environment, and further easing by the Bank of Korea cannot be ruled out, Nomura Holdings analyst Vivek Rajpal said on Jan 28 in Singapore.

Thailand's one-year interest rate swaps have been below the benchmark one-day bond repurchase rate of 2 per cent since September, indicating some investors anticipate a rate cut. The SET stock index reversed gains after the central bank kept rates unchanged on Jan 28, and dissent is growing among monetary policy committee members as fewer support holding the key rate steady.

Most analysts in a Bloomberg News survey this month expect India to cut interest rates further by the end of June. China will probably lower its one-year lending rate in the first quarter of this year, according to 11 out of 26 economists surveyed. South Korea could cut its benchmark rate in the same period, according to 12 out of 23 economists.

"Although the authorities have reaffirmed a prudent monetary policy stance, this stance will also need to be recalibrated in light of the current price dynamics in China," Australia & New Zealand Banking Group Ltd. economists including Li-Gang Liu in Hong Kong said in a report Thursday.

"The required monetary policy easing could be larger and the reactions should be faster in order to counter economic slowdown and rising deflation risk." The Fed boosted its assessment of the US economy and played down low inflation while repeating a pledge to stay "patient" on raising interest rates, after a meeting Wednesday in Washington. The comments suggest it will stick to plans to raise interest rates this year for the first time since 2006.

Policy makers kept their interest-rate target in a range of zero to 0.25 per cent, as they have since December 2008.

The fall in crude oil prices is helping boost consumption, improve current-account balances and ease inflation in most developing nations in Asia, JPMorgan Chase analysts Jahangir Aziz and Sin Beng Ong wrote in a Jan 23 note. This "should provide central banks space to cut interest rates, which would further support growth" before the Federal Reserve's rate-increase cycle, they said.

Singapore became at least the ninth nation to ease policy this month, as officials from Europe to Canada and India contend with escalating disinflation and faltering global growth. The city state's central bank said it would seek a slower appreciation of the local dollar in an unscheduled statement on Wednesday, sending the currency to the weakest since 2010 against the US dollar.

Malaysia held its key interest rate steady for a third straight meeting yesterday as policy makers balance a faltering economic outlook against pressure to shore up a weakening currency.

Other central banks are likely to follow Singapore in Asia, Daniel Tenengauzer, a strategist at RBC Capital Markets. in New York, wrote in a Jan 28 note after meeting companies and investors, citing Thailand, South Korea, China and "possibly even" Malaysia.

WP