THE dilemma facing Asian central banks is the ability to adapt to the risk of normalisation of monetary policy in advanced economies, in particular the United States. Years of expansionary monetary policy in the US, with policy rates at almost zero, low long-term interest rates and expansionary balance sheet of the US Federal Reserve Bank, has reinforced a puzzling trend, the secular decline in real long term interest rates.
Given financial market interconnectedness, Asian financial markets are now more closely linked to long term interest rates in the US and this has introduced new constraints for Asian central banks’ monetary and policy choices.