Asian interest rates under watch

AGAINST expectations of the steepest rate hikes in advanced economies since 2006, increases in Asian rates are not expected to be as aggressive.

“Inflation levels across most Asian countries are still tepid, indicating a lack of urgency for rate hikes to be as aggressive as those in the US.

“As household debt to gross domestic product (GDP) is still high across most Asian countries, raising rates too aggressively may lead to many loans turning sour.

“Following the rate hike by the Fed, the People’s Bank of China (PBoC) raised rates but by a lower magnitude of five basis points (bps) to limit outflows without hurting growth,’’ said Thomas Yong, CEO of Fortress Capital.

Hours after the Fed’s quarter percentage point raise, the PBoC increased rates it charges in open-market operations, on its medium-term and standing lending facilities, said Bloomberg.

“Raising rates by a lower magnitude helps put a lid on inflation which may pick up in the wake of firming commodity, especially crude oil, prices.

“With the right levers in place, the ongoing economic momentum will likely carry over into 2018, but by a lower margin due to the high base in 2017.

“Export-oriented Asian countries will continue to benefit from accelerating external demand,’’ said Yong.

With the world economy heading into its strongest period since 2011, Citigroup and JPMorgan predict average interest rates across advanced economies will climb to at least 1% next year, the largest increase since 2006, said Bloomberg. Malaysia has household debt of 88% of GDP and any rate adjustment would be a “normalisation” rather than a tightening.

“A slight tightening of US rates bodes well for Asia as it shows a strengthening of their economy, which is important for Asia that relies heavily on exports,’’ said Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.

“With the signalled broad support of the new Fed chief nominee Jerome Powell for current chief Janet Yellen’s monetary policy, the market generally expects a more predictable movement of currencies and funds flow. This is positive for emerging markets.

“The ringgit may gradually recover along with more stable commodities prices and upbeat global growth, which helps exports. Hopefully, this eases imported inflation which in turn, lessens the concern on rate hikes,’’ said Danny Wong, CEO of Areca Capital.

That Asian central banks are likely to tread cautiously when it comes to raising rates should work to keep their currencies quite weak against the US dollar.

“Domestic rates in Singapore, Hong Kong, South Korea and Taiwan have high correlation with US Fed funds rates.

“Asian central banks will weigh on domestic economic conditions, inflation trajectory and financial stability when changing their monetary course,’’ said Lee Heng Guie, executive director of Socio Economic Research Center.

“The Fed’s communication policy projecting rate hikes next year is not believed by markets which suspects it will be adopting the data dependent approach again next year.

“Every data point of weakness will be seized upon as a sign that the Fed is likely to freeze its just stated plan of three rate hikes next year,’’ said Pong Teng Siew, head of research, InterPacific Securities. Bank Negara has signalled a possible rate hike next year.

“Hong Kong rates are climbing and China also raised rates. To the extent that many Asian currencies are viewed collectively as a yuan block, they strengthen along with the yuan as China raises rates,’’ said Pong.

Despite a recent bounce back, the US dollar may lose more ground against the euro and yen as the prospect of strong growth and tighter monetary policy outside the US more than offsets higher rates in the US, said Bloomberg, quoting analysts and investors.

“The strengthening of the ringgit will reduce the competitiveness of our exports; however, it will be positive for capital inflows,’’ said Yong.

“We are expect the ringgit to continue strengthening until it is slightly below 4.00 to the US dollar,’’ said Hor.

Not all agree on a stronger ringgit. “The continued rate hikes and stronger US economic outlook will underpin a higher US dollar ahead, as capital flows into higher yielding US dollar-based assets. A strong US dollar prospect means a weaker ringgit,’’ said Lee.

“Malaysia is expected to weather the impact of the Fed’s policy changes in rate hikes and reduction of balance sheet. Backed by a strong banking system with adequate capital base, and a deep and liquid capital market, Bank Negara is able to manage the impact of volatile capital flows and pressure on the ringgit to ensure there is no liquidity crunch in the system,’’ said Lee.

Columnist Yap Leng Kuen hopes for stability.