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Fed’s Patience Buys Breathing Room for Asian Economies

It isn’t just the Federal Reserve. Central bankers across Asia are biding their time while they monitor global growth, and some economists even expect interest-rate cuts later this year.

What’s Happening

Policy makers in South Korea and Malaysia this week kept interest rates on hold, following a no-change vote in Indonesia earlier this month.

Several Asian central banks raised rates last year, led by an increase of 1.75 percentage points in Indonesia, as they sought to shore up their financial systems against capital outflows.

However, the Federal Reserve’s tone has shifted. Fed Chairman Jerome Powell said this month the central bank would be patient in raising rates, fueling bets that benchmark U.S. rates will remain steady or even decline this year.

The shift suggests the dollar might not rally again this year. That relieves pressure on Asia’s central banks, which might otherwise have needed to raise rates to stem currency weakness, even at the cost of crimping economic activity.

The WSJ Dollar Index, which measures the U.S. currency against 16 others, has slipped 0.1% so far this year after rising 4.3% in 2018. Some emerging-market currencies have benefited, with Indonesia’s rupiah up 1.6% against the dollar this year.

Additionally, a nearly 30% drop in Brent crude prices from a recent high in October could curb inflation in oil-importing nations, and reduce the need for their central banks to lift rates. Capital Economics this month forecast that China, India and the Philippines might even cut interest rates before the year is up.

What It Means

“Monetary policy at the Fed tends to spill over to the rest of the world, ” said Silvia Dall’Angelo, senior economist at Hermes Investment Management in London.

The change in tone from the Fed is a key reason why she is more optimistic on emerging markets this year, she said, though U.S.-China tensions could affect investor sentiment.

The prospect of steadier rates in Asia could boost government bonds. When central banks lift borrowing costs, bond yields tend to rise, sending bond prices lower.

“As long as the global economy doesn’t fall off the cliff, these EM countries will do well,” said Kisoo Park, a global bond manager at Manulife Asset Management in Hong Kong. He said he likes local-currency bonds in Indonesia and the Philippines.

Government bond yields have risen slightly in India and Indonesia so far in January, though they remain off their highs from 2018.
Source: Dow Jones

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