Asian banks cut rates, others fear fund flight

Asian banks cut rates, others fear fund flight

Reuters, Singapore

Most central banks in the Asia Pacific region look set to follow the Federal Reserve's lead and cut interest rates, but some have less room for maneuver given fears that investors might respond by shifting funds abroad.

Because of the currency peg linking the Hong Kong dollar to the U.S. dollar, Hong Kong on Wednesday promptly matched the Fed's move by cutting the base rate charged through its overnight discount window by 50 basis points to 4.00 percent.

The Reserve Bank of Australia also sprang into action, trimming its official cash rate by 25 basis points to 4.5 percent. It was the bank's fifth easing so far this year and had been widely anticipated.

Analysts also expect Taiwan to cut rates again, just as it followed the Fed's previous easing by reducing three key interest rates by half a percentage point on Sept. 18.

The Philippine central bank's rate-setting monetary board has met four times since Sept. 11 without cutting rates, citing inflationary concerns.

But Socio-economic Planning Secretary Dante Canlas told Reuters he expected the bank to cut its overnight rates by at least 25 basis points on Thursday.

In theory, most Asian countries have room to loosen monetary policy further given that their short-term nominal rates are now higher than eurodollar rates.

These interest rate premiums, again in theory, discourage outflows because they make it less attractive to borrow local currencies to fund dollar holdings.

But in reality, some central banks have inflation, currency stability and capital outflows to worry about given the poor economic fundamentals of their countries.

"In Indonesia and Thailand, for example, currency stability is still a paramount issue," said P.K. Basu, economist at Credit Suisse First Boston in Singapore.