Asia to follow Fed, some doubt the point

Reuters, Singapore

Most Asian central banks are ready to take interest rates to the chopping block assuming the Federal Reserve delivers a widely expected easing in U.S. policy when it meets on Tuesday.

But analysts say it's a "damned if you do, damned if you don't" choice for many since those that cut will not see much difference in their sputtering economies given stubbornly laggard domestic demand. And those that don't may undermine market confidence.

"Policy measures probably have not helped much in the last year or so given the nature of the global economic downturn," said Andrew Fung, Head of Treasury at Rabobank in Singapore.

"The problem is if they don't ease, they send the wrong signal to the market ... If there is anything to be gained from easing, it would show that the central banks at least recognise that economies are weak," he argued.

Economists are expecting the Fed to cut its federal funds rate for the ninth time this year at its Oct. 2 meeting to boost an economy many fear has slipped into recession after the Sept. 11 attacks. Another cut would take the rate, currently at three percent, to its lowest levels since the early 1960s.

The last Fed cut on Sept. 17 came inter-meeting and prompted Japan, Hong Kong, Taiwan, Korea, and, even policy laggard, Malaysia to lower interest rates.

Australia resisted the temptation but the Reserve Bank meets on Tuesday and much of the market there is betting it will follow a Fed move with a 25-basis-point easing of its own.

Also on the starting grid for easings are Hong Kong, Taiwan and Korea.

Blessed with stable currencies, low inflation and miniscule external debt burdens, analysts say these central banks have enough breathing space in their monetary policies to ease rates.

Moreover, growth is the main issue here. Taiwan is bracing for its first ever full-year contraction in GDP. Korea dropped its full-year GDP growth target to 2-3 percent from 4-5 percent. And Hong Kong is expected to revise down its 2001 forecast again, after cutting it to one percent from three percent in August.

Still, many doubt whether more monetary easing will produce the desired effect of boosting domestic demand given low consumer confidence and appetite for risk, and, in the case of Taiwan, local banks that are just unwilling to lend.

"It's questionable whether easing works. Liquidity has been ample in Asia all year long, but this additional liquidity has not sparked demand," said Bill Belchere, Managing Director of Asian Economics and Fixed Income Strategy at Merrill Lynch in Singapore.

"Essentially, what we've got now is that we are going to be putting more liquidity in the system in a worse global and regional situation. It's setting up a recovery somewhere down the road, but the first move is down," he said.

Indonesia and the Philippines are considered unlikely to slice rates immediately as they are both battling massive foreign debt and weak currencies, not to mention inflation in the Philippines.

"If the internal situations improve in Indonesia and Thailand then you can have substantial falls in interest rates because they really haven't fallen that much in the year to date," said Merrill Lynch's Belchere.

But political instability -- the bugbear for these countries -- has been lurking as a possible U.S. strike against Afghanistan could stir up Muslim separatist groups in the Philippines and ignite the fervour of Indonesia's Muslim radicals.

Curiously, Thailand has proved a wild card recently as to whether it may ease rates.

The country has been swimming against the tide of global easing, with the government arguing that rates were low enough already and leading to capital outflows. Indeed, the Bank of Thailand actually hiked rates in July, and has since said it would not consider lowering them.

However, the BOT hinted on Wednesday that a cut in local money market rates may come if U.S. rates and the London Interbank Offered Rate fell further.

"Thailand will look at the domestic situation. But they also take a strong view on the U.S.-Thai interest rate differential. So a Fed cut could be a way they justify reversing their hike," said Steve Brice, treasury economist at Standard Chartered Bank in Singapore.