Research Blog
Which Asian central bank will ease next?
For more details, please contact:
Mingchun Sun
(852) 2773 8751
mingchun.sun@hk.daiwacm.com
Kevin Lai
(852) 2848 4926
kevin.lai@hk.daiwacm.com
Fei Xue
(852) 2773 8767
fei.xue@hk.daiwacm.com
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12 December 2011
The central banks of Korea (BOK) and Indonesia (BI) both kept their policy interest rates unchanged at their monetary policy meetings on 6 December. The decisions were in line with our expectations and do not change our view that Asia’s central banks have already entered an easing cycle.
Changes in policy rates since 30 September 2011
Source: CEIC, Daiwa
In fact, since 30 September 2011, two Asian central banks have cut rates, with BI cutting twice, by a total of 75bps, and Bank of Thailand (BOT) cutting once, by 25bps. While the central bank of China (PBoC) did not cut interest rates, it cut the reserve requirement ratio (RRR) by 50bps in a surprising move on 30 November, the same day that six major central banks in the developed world announced a 50bp cut in the US-Dollar liquidity swap rates in an effort to ease financial firms’ funding conditions.
We expect most of Asia’s central banks to start cutting rates soon. Real GDP growth in almost all 10 economies we cover (except for Malaysia) has declined since Q410. We expect the declines to continue into Q411 and Q112, forcing more central banks to switch focus from inflation to growth. For example, while the BOK’s decision to keep rates unchanged reflected its effort to ‘firmly anchor the basis for price stability’, it expects the global economic recovery to be ‘very moderate’ and acknowledged that the ‘downside risks to growth are high’.
Changes in real GDP growth (Q311 over Q410)
Source: CEIC, Daiwa
We judge that the central bank of the Philippines (BSP) is likely to be the next to cut rates as growth in the Philippines’ declined the sharpest over the past three quarters. The BSP recently signalled it might cut rates in 2012 as inflation falls within its forecast range.
In Taiwan, while GDP growth has also fallen sharply so far this year, we do not expect its central bank to cut rates in the near term as its policy rate is already the lowest among all the Asian economies (at 1.875%). Similarly, we expect the Reserve Bank of India (RBI) to keep its rate on hold at its policy meeting this week, despite a weakening growth outlook, as stubbornly high inflation and the sharp depreciation of the Rupee are tying the RBI’s hands.
That said, we expect most Asian central banks to cut rates in Q112 as growth continues to weaken while inflation continues to recede. And while we expect no rate cut from the PBoC in 2012, we see an additional 200bps of cuts in the RRR in H112.
Mingchun Sun, Chief economist, Asia, ex-Japan
Kevin Lai, Senior economist, Asia, ex-Japan
Fei Xue, Economist, Asia, ex-Japan
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