Shaky markets force apex banks in Asia to hold interest rates

Shaky markets force apex banks in Asia to hold interest rates

Singapore: Doubts about the outlook for Asian economic growth and jittery markets that have come from the US subprime crisis are persuading regional central banks to hold interest rates steady until the financial dust settles.

The central banks of Japan, Thailand and the Philippines have held rates steady in the past week or so.

Their counterparts in Australia, South Korea and Indonesia meet next week and are expected to keep rates on hold as well.

“Generally, Asian central banks are still waiting to see how the US financial jitters are going to play out, and whether that will affect the US economy," said Frederic Neumann, economist at HSBC Corp. Ltd in Hong Kong.

The credit squeeze has already prompted the US Federal Reserve to slash its discount, or bank lending rate, and raised expectations it will cut the key fed funds rate by its next meeting on 18 September.

Serious doubt has been cast on the chances of a European Central Bank rate rise at the authority’s scheduled meeting on Thursday.

Policy direction among Asian central banks has varied. Malaysia has held rates steady, while Indonesia, the Philippines and Thailand have been cutting them. South Korea, Taiwan and India have been raising rates, but Andrew Freris, chief Asia economist at BNP Paribas, said he expected their central banks to hit the pause button.

“The crisis is likely to have caused some direction reversals, or at least reinforced the case for a period of ‘wait and see´ as the crisis played out," Freis said in a client note. “But there has been no wholesale attempt to ease monetary conditions or cut rates."

The Bank of Japan was expected to raise rates in August until the market turmoil made the central bank postpone any revisions, analysts said.

Morgan Stanley Capital International Inc.’s measure of Asia-Pacific shares ex-Japan was up more than 2%, but it was still down more than 6% from its 24 July peak.

Bank Indonesia, which left its policy rate unchanged on 7 August after 13 cuts since April last year, is expected to keep the rate steady at 8.25% come Thursday.

“It is not the right time to cut the interest rate," Miranda Goeltom, senior deputy governor of Indonesia’s central bank, said earlier this week.

Analysts expect the central bank of the Philippines that kept its overnight borrowing rate at 6% last week, to maintain the rate for the time being.

The rupiah—the worst performing currency against the dollar in Asia this year—has lost nearly 4% since 24 July.

In the latest test of central bank sentiment, the Bank of Thailand held a steady course on Wednesday, while The People’s Bank of China raised rates last week for the fourth time this year.

“China enjoys a degree of insulation from recent developments that no other major economy can claim," JPMorgan Chase & Co. economists said in a research report. Reuters