Fed's rate cut will not halt Asian slowdown

Fed's rate cut will not halt Asian slowdown

SINGAPORE (AFP): The snap decision by the U.S. Federal Reserve Board to cut key interest rates will not be enough to spare Asia from being caught in a U.S.-led global economic slowdown, analysts warned on Thursday.

Although there would be positive spin-offs, including some Asian central banks following the U.S. in cutting interest rates and a boost to Asian exports, the full impact of the benefits would not be felt immediately, they said.

"Interest rate cuts will benefit economic growth with a time lag," said Gerard Teo, a Singapore-based regional currency strategist at Dutch bank ABN Amro.

"The fact is that Asia will not escape a slowdown ... Why would it change anybody's plans overnight? The global economy will still slow down."

Steve Brice, a treasury economist at Standard Chartered Bank agreed, saying "it's very positive for Asian economies in terms of U.S. demand for Asian goods, ... but it doesn't mean that U.S. growth will bounce back up. It just reduced the downside risk in the U.S.."

What the Fed's monetary easing, made between scheduled policy- making meetings, was unable to do was dispel concerns over the pace of reforms and political uncertainties in Asia.

Asian problems "won't disappear just because (Federal Reserve chairman Alan) Greenspan cuts interest rates," Teo said

"Investors will refocus on these issues later and realize the problems in Asia have not disappeared overnight."

Thailand, Indonesia and South Korea -- which received multi- billion dollar bailout packages from the International Monetary Fund during the 1997 regional financial crisis -- are struggling to implement a raft of structural reforms.

"There is still a lot of work to be done to improve the economic structures in Asia and concerns on the pace of structural reforms remain," Teo said.

Economists were divided on the impact of the U.S. rate cuts on Japan, the region's economic superpower and the world's second- largest economy. Japan is still struggling to emerge from a decade-long slump and there are fears it could slip back into recession.

Peter Morgan at the HSBC in Tokyo said the Fed move was not enough to stop the U.S. going into recession, and was likely to be the first cut in a series.

"The impact in Japan will be more focussed on the slowdown in exports ... and that will affect Japanese exports not only to U.S. directly but exports to the rest of Asia as well because the region's growth is firmly linked to U.S. growth."

But Paul Sheard, an economist with Lehman Brothers Japan Inc., argued the cut should steer the U.S. economy towards a soft landing.

"From that perspective of the U.S. economy slowing less than it probably would have, all other things being equal it will probably be good for the Japanese economy," he said.

Reaction from Asian central banks was expected to be mixed.

The Hong Kong Monetary Authority moved immediately, cutting its base rate by half a percentage point to 7.5 percent, and the Hong Kong Association of Banks is expected to cut lending and deposit rates by the same margin on Friday.

Hong Kong Financial Secretary Donald Tsang hailing the U.S. move, said lower interest rates "will help the people who are servicing mortgages, it will help businesses in borrowing money from the banks, and it might give some incentive to the investment in the securities market."

Economists doubted there would be any immediate reaction from the Bank of Japan or the Monetary Authority of Singapore, while the Singapore-based DBS banking group forecast the Philippine central bank would ease its rates by 50 basis points to 13 percent.

Philippines central bank governor Rafael Buenaventura confirmed it would consider rolling back rates on Friday and the U.S. measure "will give the central bank more flexibility."

Bank Indonesia governor Sjahril Sabirin,, said the central bank would not automatically lower interest rates to follow the U.S., while Bank of Thailand assistant governor Thirachai Puvanartnaranubala said the Fed move would not affect the central bank's interest rate policy.

Although analysts expected Australia to lower interest rates, acting prime minister John Anderson said it was up to the central bank to consider an appropriate response.