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.