'Asian central banks unlikely to follow U.S. rate cut'

'Asian central banks unlikely to follow U.S. rate cut'

Agence France-Presse, Singapore

Domestic factors should prevent Asia's central banks from falling in line to slash interest rates after the Federal Reserve cut U.S. rates by hefty half a percentage point, analysts said Thursday.

The U.S. rate cut would however give the region's central banks more room to ease rates in the longer term if the global economic downturn worsens, they said.

Bank of America economist Simon Flint said Hong Kong, Thailand, Taiwan and Malaysia were the most likely to slash rates, while Indonesia and the Philippines may need to weigh the potential impact of such a cut on their currencies.

The Monetary Authority of Singapore had a "60-40" chance of loosening monetary policy in January, Flint told AFX-Asia, the financial news subsidiary of AFP.

Federal Reserve policymakers voted unanimously Wednesday to cut key interest rates by half a percentage point to 1.25 percent to boost a flagging U.S. economy.

It was the Federal Open Market Committee's first cut this year to the federal funds target rate, which lies at a 41-year low, and was twice as deep as expected by most market economists.

The downturn affecting Asian economies should temper the region's central banks from rushing to trim rates, analysts said.

The Fed's move "is unlikely to generate a cut in policy interest rates, on average, across Asia ex-Japan in the short term," Singapore's DBS Bank said.

"The rate cut does give central banks in the region flexibility... in the event of a worse than anticipated slowdown in the global economy since inflationary pressures remain benign on average across Asia ex-Japan," Southeast Asia's biggest lender said.

Central banks would seek guidance from domestic factors, with Hong Kong seen likely to follow with a 50 basis point cut in the rediscount rate because of its currency board arrangement, it said.

"In China and Malaysia, fixed exchange rate systems with capital controls implies that interest rate arbitrage opportunities are limited hence decoupling of policy rates from FFR (Federal Funds Rates) movements," DBS said.

Countries where domestic considerations in terms of price stability, unemployment and maintaining export competitiveness are key concerns policy rates are unlikely to follow with a rate cut, it added.

Steve Brice, the chief economist for Southeast Asia at Standard Chartered Bank, said: "The Fed's move should allow interest rates to remain lower for longer elsewhere, especially in Asia."

He said official rate cuts are "now likely" in Taiwan and Thailand "while rates should fall more quickly in Indonesia."

The Philippines could cut again but fiscal problems remain a major concern, he added.

"The handful of central banks with a bias towards raising rates may now feel more comfortable in leaving rates unchanged," Brice said, adding the Bank of Korea was likely to take heart from the Fed and further delay any rate hikes.

Later on Thursday, the South Korean central bank announced it would hold key interest rates at 4.25 percent for the sixth consecutive month, despite inflationary pressures.

DBS Bank however said the Philippines and Thailand are unlikely to cut rates in the fourth quarter "as the central banks in these countries are concerned about competitiveness of their exports through exchange rate appreciations."

It said "Indonesia is constrained by the monetary targets set by the International Monetary Fund."

Taiwan "will most likely cut discount rates" but the degree may be less depending on the central bank's view of the global macroeconomic environment in the short term, DBS said.