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Emergency Rate Cuts Loom for Asia as Virus Slams Economies

Wednesday 11th March 2020

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Central bankers across Asia Pacific must consider whether they can afford to wait until their next scheduled policy meetings or respond sooner to mounting global risks from the coronavirus outbreak and oil-price plunge.

The Federal Reserve set the pace with an emergency 50 basis-point interest rate cut last week. None of Asia’s central banks immediately followed the Fed, but some have added liquidity.

With policy meetings still some weeks away for India, South Korea and Malaysia, analysts see those countries as being prime candidates to deliver off-schedule rate decisions. Much will depend on whether global markets rally and credit conditions ease, which would take the pressure off central banks to move aggressively.

“There is a strong impetus to piggy-back on the Fed to ease in Asia,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. Softer oil prices and demand-shock pressures could precipitate intra-meeting action, he said.

The Asia calendar looks quiet up until the Fed’s March 18 rate decision in Washington. Hours later, policy makers in Japan, Indonesia and the Philippines are scheduled to announce their rate decisions, with Thailand and New Zealand following on March 25.

In China and Vietnam, where central banks don’t follow a schedule of publicly announced meetings, a move can come at any time.

Thai central bankers signaled Monday they’ll wait to adjust policy until their regular meeting, as they examine developments in oil and global markets. The Bank of Thailand cut its benchmark interest rate to a record low Feb. 5 amid worries about coronavirus, while also citing the need for liquidity injections and debt restructuring.

Banks that choose to wait may be pressured to move more aggressively. That may be the case for the Reserve Bank of New Zealand, which left rates unchanged last month, according to Eleanor Creagh, a strategist at Saxo Capital Markets in Sydney.

Having already surprised with a half-point rate cut in August “and with headwinds for the New Zealand economy mounting, taking international policy moves into account along with declining inflation and growth expectations, we expect the RBNZ to cut the official cash rate by 50 basis points on March 25,” she said.

Others might find they can’t be so patient. Here are a few Asian central banks that could move in coming weeks:

The Reserve Bank of India doesn’t have a scheduled meeting until April 3. India so far has reported few virus cases and its economy is less vulnerable to external risks, but Governor Shaktikanta Das has signaled easing on the horizon. Hours before the emergency Fed cut, Das told Bloomberg there was a strong reason for coordinated action and that he was prepared to cut interest rates.

Varathan sees the RBI poised to take action before its scheduled meeting, but says the central bank is more focused on liquidity injections than a benchmark interest-rate cut -- partly because interest-rate transmission has been faulty, and since targeted relief would be less destabilizing for the currency. Inflation also remains well above the central bank’s 2%-6% target band, making a rate cut less palatable.

Key to an unscheduled move will be the outcome of the upcoming Fed meeting, said Kerry Craig, a global market strategist at J.P. Morgan Asset Management in Melbourne.

“If the Fed were to make a very large move in rates -- more than 50 basis points for example -- then there will be more pressure applied to those central banks not scheduled to meet until April, such as India, to bring forward a policy response and make a larger cut,” he said.

The last time Indian officials made an unscheduled monetary policy announcement was in 2015, when they acted alongside more than a dozen central banks in easing interest rates early that year with low oil prices causing subdued inflation.

Not slated to meet until April 9, the Bank of Korea is a top candidate for an unscheduled move, said Tuuli McCully, head of Asia Pacific economics at Scotiabank in Singapore.

After keeping rates on hold in February, South Korea’s central bank “is behind its central bank peers who have eased policy much more decisively,” she said.

The bank convened an emergency meeting a day after the Fed’s surprise rate cut, but disappointed markets by falling short of pledging action. Expectations are growing that the bank will convene an off-cycle policy meeting this month to cut rates, as it did in the depths of the global financial crisis.

Bank Negara Malaysia has eased interest rates twice this year -- a rare move globally, and one that goes against BNM’s own tendency to avoid back-to-back cuts. Its next gathering is scheduled for May 5 -- the most distant among central banks in the region with scheduled decisions.

The central hasn’t had any unscheduled interest-rate moves since at least 2009, but in November unexpectedly announced a reduction in its reserve ratio. The softening in oil prices gives the bank added impetus for an immediate policy reaction.

“Malaysia is most exposed to the negative impacts of low energy prices as a net exporter,” said Steve Cochrane, chief Asia-Pacific economist at Moody’s Analytics in Singapore. “While they just eased recently, they may ease again quickly.”


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