LOW US inflation that is considered transitory, may provide some relief to Asian markets already alert for any change in the US interest rate stance.
In deciding to stay put and not give in to intense pressure to lower rates, the Federal Reserve may be concerned, among other things, about further fuelling asset bubbles.The Fed funds rate may remain the same in 2019-2020; there is no threat for the Fed’s outlook on inflation at around 2%, to overshoot that level.
On a 12-month basis, overall US inflation and that for items other than food and energy, had declined and is running below 2%, said the Fed.Could the Fed’s reading of transitory inflation suddenly change?
On Dec 17, 2014, the Fed had also stated its patient stance and kept rates unchanged until September, 2015.
By Dec 16, 2015, it had ‘a modest increase’ in rates for the first time since 2006, in view of the US economy performing well.
“There is a risk that the Fed may make the same mistake in its assessment of transitory effects on inflation,’’ said Dr Anthony Dass, head of AmBank Research.
This time, the scenario is different; AmBank Research is putting a 60% chance for a rate cut, despite its base case for “no rate hike” in 2019.
The Fed is not lowering rates even as more evidence of a slowing goods market, creeps in.
If it were to do so, very quickly, rates would become too low even for purposes of accommodation and equilibrium.
Money would be diverted to fuel froth in asset markets and disrupt the equilibrium in foreign exchange markets, said Pong Teng Siew, head of research, Inter-Pacific Securities.
The Fed’s continued pause in rate hikes provides an opportunity for some Asian central banks to lower rates that were raised last year, following US rate hikes.
As central banks in Asia cut their forecasts for growth and exports, they can shift the focus of their monetary policy to support growth, said Suhaimi Ilias, group chief economist, Maybank Investment Bank.
With inflation largely not an issue, Asian countries that can cut rates include Indonesia, the Philippines, Thailand and Malaysia.
Following President Joko Widodo’s election victory and renewed focus on growth, Indonesia is expected to cut rates, with inflation remaining subdued and the rupiah stabilising.
Indonesia had aggressively raised its benchmark rate six times last year to 6% as the rupiah came under pressure amid capital outflows.
The annual inflation rate for Indonesia rose 2.83% in April, the highest this year, but within the central bank’s target range.
In the Philippines, the benchmark rate was raised for five straight months last year, to 4.75%, to fight inflation which hit a nine-year high of 6.7% last September.
Inflation in the Philippines has cooled for five straight months, to 3.3% in March, the lowest since December 2017.
Thailand’s central bank has cut its growth forecast twice in three months, to 3.8%, but kept rates unchanged as domestic demand helped to offset the fall in exports.
The annual inflation rate for Thailand was 1.23% for April.
Malaysia’s inflation rose 0.2% in March, following decreases of 0.7% and 0.4% in January and February respectively.
Malaysian exports fell 0.5% in March, year-on-year, after an unexpected drop of 5.3% in February; its industrial output rose at a slower pace of 1.7% in February, year-on-year, sharply lower than an expansion of 3.2% in January.
Asian countries undertaking fiscal spending via, among others, increased public spending or tax reductions, include China, Japan and South Korea.
China is pursuing a proactive fiscal policy, where the deficit-to-Gross Domestic Product (GDP) ratio is expected at 2.8%, up 0.2% from 2018.
Fiscal stimulus for China can hit 4.25% of GDP in 2019, from 2.94% in 2018, said the Organisation for Economic Co-operation and Development, which sees risks in the build-up of corporate debt.
Japan, which is planning for a twice-delayed consumption tax hike, has outlined fiscal measures to ease the impact of that tax.
With exports slowing, Japan has been advised by the International Monetary Fund to increase fiscal spending rather than postpone the tax which will help with its huge public debt.
South Korea, where exports declined for four straight months to March, has proposed an extra budget of US$5.9bil to fight air pollution, boost exports and, to a certain extent, help in economic recovery.
“Asian governments are well-prepared to manage the impact of the slowing global economy; some have the monetary space to cut rates, independent of the Fed’s rate path,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.
Others have more fiscal room to undertake selective stimulus spending.
Columnist Yap Leng Kuen hopes for more stable times.