Asian Focus: Peripheral central banks have plenty of ammunition

In this Asian Focus video Andrew Robinson, FX Analyst for Saxo Capital Markets in Singapore takes a look at how peripheral Asian central banks are positioned for handling the global economic slowdown. In particular he looks at the central banks of India, South Korea and Indonesia and to what degree their monetary policy decisions are affected by People’s Bank of China actions. 

In general, Asian central banks are better positioned to lower interest rates than western central banks. They appear to have a lot more ammunition in their toolboxes because interest rates are nowhere near zero, says Andrew. One of the biggest problems for Asia though, which has prevented much monetary action, has been inflation, though this seems to be dissipating.

So the ability to act exists and when it comes to the need, there are already warning signals, says Andrew. China’s growth is at a three-year low and South Korean growth is close to a two-year low, so they are ready and able to act. It’s just a question of when and by how much.

Just recently the Bank of Korea surprised the markets with a 25 basis point cut emphasising that this was due to the global economic slowdown - a kind of insurance measure rather than based on the real need to do anything. That’s now setting the tone for most of the central banks across the region, says Andrew.

Concerning the Asian region’s kingpin, China, there’s no doubt that any People’s Bank of China interest rate moves are important for the peripheral Asian economies but they do not generally prompt similar actions. It’s a similar story regarding the Federal Reserve’s actions, with the last non-descript words from Chairman Ben Bernanke providing no clues for the Asian central banks.

It’s all going to be very much dependent on the individual economies as to when the Asian central banks make their moves, says Andrew. They will make their moves mostly on their own accord when they feel it is necessary, he says.

India and Indonesia stand out
Two cases which stand out in the Asian region are India and Indonesia - India because of its huge struggle with high inflation and Indonesia because its economy has largely been unaffected by the global economic slowdown.

Whilst the rest of Asia is enjoying slowing inflation India’s inflation rate is just above 7 percent on an annualised basis but down from a peak of 9.2 percent, which is why the Reserve Bank of India left rates unchanged in June. It is a central bank really on its own struggling with the age-old theme of high inflation, so rates will be on hold until inflation starts to behave, says Andrew.

In contrast, Indonesia has never really struggled during the economic downturn of the last three years and inflation is steady. This indicates that the Bank of Indonesia will probably keep rates on hold for the rest of the year or only make a small cut in the third quarter, says Andrew.