Asian central banks, governments breathe sigh of relief after Fed lifts off

A woman rides past the headquarters of the People's Bank of China.
A woman rides past the headquarters of the People's Bank of China. PHOTO: REUTERS

SYDNEY (REUTERS) - Asian governments and central bankers breathed a collective sigh of relief on Thursday (Dec 17) after currencies edged up and stocks rallied rather than recoiled at the US Federal Reserve's decision to raise interest rates.

The prospect of the first hike in US rates in almost a decade had kept emerging markets on edge in the weeks leading up to the Fed's decision, amid fears investors would redirect capital to higher-yielding US debt in a fresh blow to their shaky economies.

However, an initial rally smoothed the brows of Asian central bankers who were the first to respond to the hike as US policymakers sought to end an era of ultra-low rates that followed the global financial crisis.

"It is a relief that even despite the Fed rate hike, turbulence in global financial markets has not been large," said South Korean Vice Finance Minister Joo Hyung-hwan.

The more composed initial reaction was aided by the fact the Fed had clearly flagged the move in advance, and also said the pace of tightening would be gradual - an important signal for many asset markets adjusting to less stimulus after years of flush Fed liquidity.

However, Citibank's Asian economic team said while equities and credit market had perked up, the response of commodity market suggested caution.

"We have long argued that early signs of growth in emerging markets would be seen in commodity markets, so we take heed that neither energy nor metal prices shared the optimism of the equities and credit markets," the analysts said in a report.

Hong Kong's top central banker, who was obliged to immediately match the Fed's hike under the Chinese-run city's peg to the US dollar, said he expected only a modest outflow of capital as a result of the Fed's move.

China's central bank also added to the reassuring mood, pencilling in economic growth of 6.8 per cent for next year in a working paper released on Wednesday, down only slightly from an expected 6.9 per cent this year.

A senior researcher at an official Chinese think tank chimed in, saying the hike would not lead to major economic disruption.

Zeng Gang, director of the Chinese Academy of Social Sciences banking research division, told the official People's Daily paper that as the rate rise had been widely expected, it had been priced into markets and the announcement impact was limited.

Data showing drops in exports from Japan and Singapore, including big falls in shipments to China, sounded some of the few sour notes on Thursday, but Tokyo too voiced relief that emerging markets were taking the US rate hike in their stride.