Asia's central banks behind rate-cutting curve

ASIA'S central banks are in danger of falling behind the yield curve. The region's monetary authorities have so far failed to heed bond investors' legitimate worries about disinflation. Their reticence could imperil both GDP growth and financial stability.

Investors have been pushing down interest rates across Asia. The average yield on 10-year sovereign bonds issued by the region's 10 major economies has fallen almost 80 basis points over the past year. Yet short-term policy rates have barely budged. The narrowing gap shows that the growing sense of alarm over disinflation in the marketplace has yet to upset the relative calm in policymakers' ivory towers. That could turn out to be an error of judgment.

Central banks may be worrying about a repeat of the mid-2013 "taper scare", when the prospect of higher interest rates in the United States prompted foreign investors to flee Asian markets. If that's the case, they are fighting yesterday's battles. Yields on 10-year US bonds have dipped below 2 per cent; Japanese government debt of similar maturity yields 0.28 per cent - a record low. Hot money will only flow out of the region if rates in advanced economies are much more attractive.