Monetary policy goals still unclear in most Asian nations
Monetary policy goals still unclear in most Asian nations
HONG KONG (Dow Jones): After two years in which the region's financial crisis dominated their decisions, Asian countries have finally regained some freedom to set monetary policy - and some are finding it difficult to reconcile conflicting goals.
From 1997 until recently, monetary policy around the region was largely crisis-driven - countries had to raise rates to halt free-falls in their currencies, then loosen credit to support their stumbling economies.
As the crisis atmosphere lifts, however, it's no longer clear whether monetary policies are focusing most on exchange rates, growth or inflation.
"It's definitely not clear-cut because they've got so many things to juggle," says Li Lian Ong, economist at Macquarie Bank in Sydney. The mix of strategies "is very much a hodge-podge at present", she adds.
One example is South Korea, the country furthest along in pulling out of its economic slump. Government officials have been referring to several seemingly contradictory desires: to cool capital inflows into the won, which would suggest lower interest rates, while ensuring inflation is kept at bay and the stock market is kept under control, goals best achieved with higher rates.
For the moment, according to new South Korean Finance Minister Kang Bong-kyun, rates will be kept in single digits to help the debt-laden corporate sector and keep the won from rising. "There have been concerns the local stock market may be overheating as a result of low interest rates, but this shouldn't be cause for worry as inflation is expected to be capped at around 3.0%," he said.
But South Korea has "been sending mixed signals", notes Frank Gong, currency strategist at Bank of America in Hong Kong. He says officials there have also been hinting that higher interest rates might be needed to slow portfolio investment and prevent a stock market bubble - and these hints have prompted a dramatic rise in Korean bond yields in recent weeks.
Other Asian countries are starting to face the same kind of dilemma. In the Philippines, authorities' efforts to push down Treasury bill yields at weekly auctions have run into growing opposition from commercial banks, which have been placing higher bids than the central bank wants. That has some analysts predicting the long downtrend in Philippine rates may soon end.
In Hong Kong, the markets have been confused by comments by Chief Executive Tung Chee-hwa suggesting that a rate cut may be needed to spur the economy - even though, as Hong Kong Monetary Authority chief Joseph Yam pointed out, the Hong Kong dollar's peg to the U.S. dollar would seem to imply that the next Hong Kong rate move should be up.
Malaysia may be the only country where the focus of monetary policy remains clear; its capital controls and fixed exchange rate mean policy can focus on growing the economy.
Asian countries' dilemmas may be brought to a head by the U.S. Federal Reserve Board's statement last week that it is more likely than not to raise interest rates. A U.S. rate hike would mark the first time since Asia's crisis began that the trend in Fed policy was running counter to strategies in the region, so the response of Asian countries could reveal what they see as their biggest economic vulnerability: the exchange rate or underlying growth.
The betting is still that many countries will retain a downward bias in monetary policy, with the possible exceptions of South Korea and Singapore, where inflation could become a worry, and Hong Kong, which has its currency peg.