Asia policymakers spared Fed jolt, take rate hike in stride
Jakarta, December 17
Asia policymakers today applauded an historic turn in US monetary policy, but analysts cautioned that the region’s economies faced vulnerabilities even as 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 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.
“The Fed’s action brings an end to the lift-off uncertainty,” said Amando Tetangco, the governor of the Philippine central bank.
The palpable relief among policymakers, and investors, comes as the global economy navigates through 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 United States.
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 today, and other regional currencies rose initially before pulling back, with Indonesia’s President Joko Widodo welcoming Fed’s decision ‘because there is certainty’.
“The effect is positive for us — the stock index rose, the rupiah strengthened, the financial market reacted positively,” he said.
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.”
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 per cent for next year in a working paper released on Wednesday, down only slightly from an expected 6.9 per cent 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 today, but Tokyo too voiced relief that emerging markets were taking the US rate hike in their stride.
Indian policymakers, including Reserve Bank of India (RBI) 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.