A woman holds peso banknotes after exchanging dollars inside a money changer in Manila. “The Fed’s action brings an end to the lift-off uncertainty,” said Amando Tetangco, the governor of the Philippine central bank, which left interest rates on hold at a monetary policy meeting yesterday.
Reuters, Bloomberg
Jakarta
Asian policymakers yesterday applauded a historic turn in US monetary policy, but analysts warned the region’s economies face vulnerabilities, with Taiwan cutting interest rates, although markets took the Federal Reserve rate hike in their stride.
The prospect of the first hike in US rates in almost a decade had kept emerging markets on edge in the weeks before the 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. “The Fed’s action brings an end to the lift-off uncertainty,” said Amando Tetangco, the governor of the Philippine central bank, which left interest rates on hold at a monetary policy meeting yesterday.
Taiwan’s central bank unexpectedly cut its policy rate by 12.5 basis points, suggesting that worries about the region’s sluggish growth, not capital flight, are at the front of policymakers’ minds.
Bank of Japan policymakers are still likely to debate lingering risks to the economic outlook that could warrant additional easing in coming months, particularly the oil price rout that is pushing down consumer prices and eroding companies’ inflation expectations.
The Hong Kong Monetary Authority raised its base rate for the first time in nine years, following the US Federal Reserve’s lead overnight, and flagged the risk of rising capital outflows from the city.
Hong Kong’s key rate was raised to 0.75% yesterday, from 0.5%, HKMA said. Because Hong Kong’s currency is pegged to the US dollar, the city’s monetary policy typically moves in line with the Fed.
The relief among policymakers, and investors, comes as the global economy navigates some rough terrain, with many export-reliant economies hit by cooling growth in China and deflationary pressures rising amid a collapse in commodities.
Add to that mix pedestrian growth in Japan and the eurozone, and it isn’t hard to see why many investors were nervous about the prospects of rising borrowing costs in the US.
Indeed, the more composed initial markets 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.
Indonesia was at the centre of the “taper tantrum” in mid-2013, when the Fed talked about cutting its bond purchases, and this year its rupiah currency has been one of the region’s worst performers.
But the rupiah rallied yesterday, and other regional currencies rose initially before pulling back, with Indonesia’s President Joko Widodo welcoming the Fed’s decision “because there is certainty.”
Bank Indonesia kept interest rates unchanged yesterday, as expected, but said it saw more room to lower them next year, although it would monitor market reaction to the Fed hike.
“The effect is positive for us — the stock index rose, the rupiah strengthened, the financial market reacted positively,” Widodo told reporters.
Others, however, cautioned that higher interest rates would pose problems for economies that were too reliant on debt-fuelled growth.
“The Fed’s hike will stiffen the headwinds for growth in Asia,” said Fred Neumann, HSBC’s chief Asia economist.
“Rising funding costs, especially in highly indebted economies, will slow the leverage cycle on which regional demand has increasingly come to depend,” he said.
And despite the Fed hike, policy in much of Asia is set to loosen further in a reflection of the fitful growth in the region.
Barclays economist Wai Ho Leong expects monetary easing in the first half of next year to be led by India, China and probably also Indonesia and South Korea.
“No one is turning hawkish after the Fed has hiked,” he said.
“Most central banks are dovish. This is to counter the effects of the trade recession, which hits Asia disproportionately harder than any other region in the world.”
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% for next year in a working paper released on Wednesday, down only slightly from an expected 6.9% this year.
Data showing drops in exports from Japan and Singapore, including big falls in shipments to China, sounded some of the few sour notes yesterday, but Tokyo too voiced relief that emerging markets were taking the US rate hike in their stride.
Indian policymakers, including Reserve Bank of India Governor Raghuram Rajan, have been touting the South Asian nation as being more insulated to Fed-related volatility than other emerging markets, due to its better economic fundamentals.
“I think we are relatively well cushioned,” chief economic adviser Arvind Subramanian said.
