Pressure on Asian central banks to ease policies

The Union Jack and British pound banknotes on display outside a bank in the South Korean capital Seoul. South Korea last week unveiled an US$8.5 billion (S$11.4 billion) economic support package to weather the Brexit shock, giving the central bank room to
The Union Jack and British pound banknotes on display outside a bank in the South Korean capital Seoul. South Korea last week unveiled an US$8.5 billion (S$11.4 billion) economic support package to weather the Brexit shock, giving the central bank room to hold off immediate policy stimulus. PHOTO: BLOOMBERG

Britain's vote to leave the European Union has ramped up the urgency for some Asian central banks to ease monetary policy, as prolonged uncertainty threatens a wider downshift in trade and investment.

Economists warn that delayed investment decisions and a hit to jobs and consumption from Brexit will hurt exports from Asia's trade- reliant economies, which are already reeling from weak external demand, particularly from China.

A round of Asian central bank meetings this month could reveal an increased bias to ease policy, if not deliver interest rate cuts.

"The uncertainty of the EU and UK relationship is likely to put a dampener on Asia's exports to that region, perhaps extending Asia's trade recession," said ANZ's Singapore-based head of research in Asia, Mr Khoon Goh.

HSBC sees increased prospects of easing in Australia, China, Japan, New Zealand, South Korea and Thailand although the risks of inflation from currency weakness could constrain policy options in emerging markets like India, Indonesia and Malaysia. "Not everyone has the same room for manoeuvre," said Hong Kong-based Frederic Neumann, co-head of Asian economics research at HSBC.

The Reserve Bank of Australia skipped a chance to ease again when it met yesterday, as it awaited second-quarter consumer price data due on July 27, but markets are betting on a cut in August, given low inflation and the Brexit uncertainty.

Central banks in South Korea and Malaysia meet next week and while economists do not expect them to ease, their policy rhetoric could reveal a more dovish bias.

South Korea last week unveiled an US$8.5 billion (S$11.4 billion) economic support package to weather the Brexit shock, giving the central bank room to hold off immediate policy stimulus.

And despite policy constraints, pricing for a Bank Negara Malaysia rate cut has increased in recent days with five- and 10-year government bond yields falling to their lowest since 2013.

Looming against these scheduled policy meetings are expectations that China's central bank will offer more stimulus in the near term to jumpstart the world's second-largest economy.

Brexit has also delayed expectations of the US Federal Reserve raising interest rates this year.

That may pressure smaller and vulnerable economies like Singapore, whose economy is dwarfed by trade flows, as a higher local currency would weigh on its already struggling exports.

Nowhere is the currency effect more acute than in Japan where the central bank in January introduced a negative interest rate policy in a desperate effort to revive the world's third-largest economy.

The yen's spike last month, led by Brexit-driven safe-haven flows, has increased expectations that the Bank of Japan's will further expand monetary stimulus at its July 28-29 meeting.

"Luckily, the Bank of Japan is not likely to sit idly by: expect officials to try to lean against an overly rapid climb of the yen. Direct forex intervention is certainly one possibility, but additional monetary easing will need to be part of the mix," HSBC's Mr Neumann said.

REUTERS

A version of this article appeared in the print edition of The Straits Times on July 06, 2016, with the headline 'Pressure on Asian central banks to ease policies'. Print Edition | Subscribe