Bloomberg News

Asian Central Banks Signal Rate Rises Off Table Amid Turmoil

September 26, 2011

(Updates stocks, currencies in fifth paragraph.)

Sept. 26 (Bloomberg) -- Central bankers from three Southeast Asian nations signaled that global financial-market turmoil will diminish inflation pressures in their economies, making interest-rate increases unlikely in coming months.

Bangko Sentral ng Pilipinas will probably refrain from boosting rates for the rest of 2011, Governor Amando Tetangco said in a Sept. 24 interview. Thailand’s central bank may cut its economic growth projections, Governor Prasarn Trairatvorakul said the same day. Bank Negara Malaysia Governor Zeti Akhtar Aziz said yesterday her country’s inflation has probably peaked.

The reduced likelihood of rate increases may curb demand for Asian currencies, which already last week tumbled the most since the region’s financial crisis in 1998, as investors flocked to the U.S. dollar as a haven. Policy makers may turn to cutting commercial banks’ reserve requirements as their next response, Standard Chartered Plc economists said today.

“Growth concerns are beginning to outweigh inflation worries,” said Robert Prior-Wandesforde, Singapore-based head of India and Southeast Asia economics at Credit Suisse Group AG. “It doesn’t make sense for interest-rate increases given the stock market rout we’ve seen.”

Stocks Fall

Stocks in Asia dropped today, with the MSCI Asia Pacific index losing 2.4 percent as of 6:06 p.m. in Singapore. Asian currencies weakened, led by South Korea’s won and the Indonesian rupiah, on concern that Europe will fail to contain its worsening debt crisis, damping the outlook for Asian exports and reducing demand for emerging-market assets. The Bloomberg- JPMorgan Asia Dollar Index fell toward a 10-month low.

“Stable to potentially falling interest rates in Asia reduces the attractiveness of the region’s currencies,” said Prior-Wandesforde. “It’s part of the reason why we’ve seen them decline coupled with the creeping realization that Asia is not immune to a Western world slowdown.”

U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the International Monetary Fund that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. is forecasting that advanced economies will stall over the next year as Europe slides into a recession.

Indonesian Intervention

Indonesia’s central bank said it intervened to curb losses in the rupiah this month, while policy makers in South Korea and India said they were prepared to intervene to stabilize their currencies if necessary. South Korea’s financial regulator hasn’t decided whether it will add additional capital to a fund that was set up to stabilize the stock market, Financial Services Commission spokesman Ernst Lee said by phone today.

Thailand has “ammunition to do some market intervention” to lessen volatility in the baht, Prasarn said, while the Indian rupee’s decline in “so short a time” is a concern, Reserve Bank of India Deputy Governor Subir Gokarn said in a speech yesterday.

Malaysia’s central bank has intervened in currency markets to limit the swings in the ringgit, Zeti said, without specifying when officials did so.

“Intervention has already occurred in Asia in increasing scale to address dollar funding, with the next stage of the response likely to be the reversal of reserve-requirement hikes,” Standard Chartered economists wrote in a research note. “This suggests that policy rate cuts remain some way off, while a fiscal policy response is further behind still.”

Debt Crisis

Finance ministers recognized the gravity of Europe’s debt crisis and resolved to do whatever it takes to prevent it from escalating further, Tharman Shanmugaratnam, chairman of the International Monetary Fund’s steering committee and Singapore’s finance minister, said Sept. 24 after the annual meetings of the fund in Washington.

The IMF said it is ready to “strongly support” European nations’ efforts to resolve the region’s sovereign debt crisis.

“Looking at the current developments in the world market, you may probably get somewhat lower inflation expectations,” Prasarn said. “If that were so, we would probably have closed the gap somewhat” on normalizing borrowing costs, he said. The Bank of Thailand raised its key rate for a seventh straight meeting last month to 3.5 percent.

Meantime, Bangko Sentral ng Pilipinas forecasts inflation this month will be “somewhat lower” than the bank’s estimate for August, Tetangco said. Inflation eased for a second month last month.

Tetangco and his colleagues held their benchmark rate at 4.5 percent for a third straight meeting on Sept. 8 after increasing it twice earlier this year.

Malaysia is waiting “for greater clarity on the outlook for growth and inflation before taking any further adjustments” on rates, Zeti said. Bank Negara Malaysia kept its benchmark overnight policy rate at 3 percent this month after four increases from early March 2010 to May this year.

Both Malaysia and the Philippines ordered lenders to set aside more cash as reserves earlier this year.

--With assistance from Seonjin Cha in Seoul, Suttinee Yuvejwattana in Bangkok, Lily Nonomiya in Tokyo, Sunil Jagtiani and Kyoungwha Kim in Singapore. Editors: Stephanie Phang, Chris Anstey

To contact the reporters on this story: Shamim Adam in Washington at sadam2@bloomberg.net; Karl Lester M. Yap at kyap5@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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