Asia could follow suit with rate cut

Asia could follow suit with rate cut

SINGAPORE (AFP): The U.S. Federal Reserve's decision to cut interest rates for the first time in three years was seen by analysts yesterday as a possible signal for Asian central banks to move towards softer rate regimes.

But a loosening of monetary policy, while boosting equities markets, could fan inflation in some rapidly growing regional economies and possibly lead to current-account pressures, the analysts warned.

Eddie Lee, analyst at the Vickers Ballas investment research house, expected banks in Singapore and Malaysia, and possibly other countries with close economic links with the United States, to follow eventually the Fed's lead.

"I think it is quite clear that we are going to see softer rates," said Lee, who considered the U.S. rate-cut as a turning point in the interest-rate cycle with more reductions down the road.

"We can expect a prime rate cut in Singapore in the second half. In Malaysia, if U.S. rates are coming down, it will be hard to hold rates at the current level," he said.

Alex Chng, an analyst with Alliance Securities in Singapore, said countries such as Singapore and Malaysia could face rampant liquidity flush with foreign inflows if they did not lower rates.

Singapore's banks, which are free to set their own interest rates, reversed a 16-and-a-half-month upward trend by lowering prime lending rates by 0.25 percentage points to six percent last month.

The move came at a time when Singapore dollar interbank rates plunged to new lows as U.S. dollar holders converted funds into the Singapore currency, seen as a haven for funds looking for better returns.

Chng predicted the rate could be cut by a further quarter of a percentage point at least.

In Malaysia, the central Bank Negara is likely to allow interbank rates to fall in the short term to prevent "a surge of foreign funds entering the market," said Ghazali Atan, chief economist of SJ Securities.

The Hong Kong Monetary Authority and the Hong Kong Association of Banks said they would keep their rates steady for the time being.

The Bank of Thailand also said yesterday it would maintain its current rates, but an analyst in Bangkok said the central bank would sooner or later have to cut rates or risk excess liquidity as foreign money flows in to take advantage of the interest rate spread.

Chan Kok Peng, an economist at Smith New Court in Singapore, warned that a softer interest rate regime held potential dangers for some Asian economies.

"Malaysia, Thailand and Indonesia are growing very rapidly. If they follow the U.S. cut, they will spark off very strong domestic demand which will worsen inflation and their current account balance," Chan said.

"If they are prudent, they will resist it (a rate cut). What these countries need least is a loosening of monetary policy," he added.

Indonesia

Indonesian analysts said liquidity problems, a declining export surplus and a widening current account deficit have triggered expectations of an accelerated depreciation of the rupiah, working against any rate cut there.

Rizal Ramli from the Econit think-tank said yesterday's cut may actually encourage a rise in domestic interest rates.

Australia scotched speculation that a domestic easing of rates would follow, with a spokesman for Treasurer Ralph Willis saying: "While overseas interest rates are not irrelevant, the principal determination of Australian interest rates is our domestic economic conditions."

The decrease of a quarter of a percentage point in lending rates ordered by the Fed Thursday to stimulate a slowing U.S. economy followed seven increases between February 1994 and February 1995 to counter inflationary pressures.

Analysts greeted the rate cut, which ended weeks of speculation about the direction of the rates as a boost to regional markets, as a lowering of rates paves the way for a shift to greater investment in stocks from fixed-income instruments.

"The lowering of rates would give investors some confidence that U.S. authorities are taking action to stimulate the economy," said Chan Tuck Sing, dealing director of OUB Securities in Singapore.

"Now that investors have got an indication of which way interest rates move, they will get off the sidelines," he said. Other dealers expected rate-sensitive property and banking stocks to perform well.