Asian markets rallied yesterday amid expectations that the United States Federal Reserve would cut interest rates for the first time in a decade later this month to kick-start flagging growth.
This came after a senior Fed official indicated that there was a need to act ahead of an economic slowdown. With the US-China trade war pushing US manufacturing into a recession last month and other data pointing to slowing growth, the markets were betting that the Fed would aggressively cut rates by as much as 50 basis points to revive the economy.
Across Asia, Japan rose 2 per cent, South Korea gained 1.35 per cent and Hong Kong was up 1.07 per cent. Shanghai, Shenzhen, Taiwan, Singapore and the rest of South-east Asia posted gains of less than 1 per cent.
New York Fed president John Williams had said on Thursday that policymakers could not wait for economic disaster to hit before adding stimulus.
Central banks are responding earlier and more aggressively as the world economy slows and inflation remains benign. On Thursday, Indonesia and South Korea cut their benchmark interest rates by 25 basis points for the first time in years ahead of the Fed's policy decision on July 31.
Since May, India, Malaysia and the Philippines have cut interest rates, as has Australia. Singapore is also expected to ease its monetary policy.
"This is very different from the Great Financial Crisis when inflation was high, which made it harder for central banks to cut rates pre-emptively," said Dr Chua Hak Bin, an economist at Maybank Kim Eng Research. Low inflation had reduced the risk.
"A rate cut now is seen as an 'insurance move'... and the repercussions seem minimal. But if you act later, the costs could be higher because the policy impact comes with a lag," he added.
All eyes are on US second-quarter gross domestic product data to be released next week. Market consensus points to a slowdown to 1.9 per cent quarter on quarter from 3.1 per cent in the first quarter.
If Singapore slips into a technical recession by the third quarter - meaning two consecutive quarters of GDP decline - it will justify the Monetary Authority of Singapore easing monetary policy, Dr Chua said. For Singapore, which has aimed to gradually appreciate the Singdollar against a basket of currencies, this could mean shifting to a "zero appreciation" bias, he said. A weaker currency spurs growth by making exports cheaper.
"They may also need to provide fiscal stimulus to the worst-hit sectors, which will likely be trade-related services and manufacturing," said Dr Chua.
CIMB Private Banking economist Song Seng Wun said the rate cut is a done deal, and the question is how deep the cut will be.
"There are a lot of expectations of a 50-basis-point cut. But that would signal the Fed is panicking over the economy, and it isn't at that stage to warrant such a steep cut. We are expecting a 25-basis-point cut by July, and then another 25-basis-point cut in September," he said.
Meanwhile, Singapore's bank counters rose, with DBS and UOB up more than 1 per cent, and OCBC up 0.9 per cent ahead of second-quarter earnings results.
Phillip Capital trader Marcus Toh attributed this to optimism over their first-half results.
Dr Chua noted that business loans to the region are strengthening because the trade war has led to a diversion of investment to Asean.
SEE BUSINESS: Experts say risk of US move to weaken dollar has risen
