Central banks across key emerging markets finally joined the the tide of monetary policy easing Thursday as the world economy slows.
South Africa, Indonesia and South Korea, initially slow to follow peers in lowering borrowing costs, all announced a quarter-point cut in interest rates. In Latin America, Chile kept its key rate unchanged after last month’s shock half-point reduction.
The move by two of Asia’s biggest emerging markets and Africa’s most-industrialised economy demonstrates that even those reluctant to cut are now being forced to respond as global risks worsen. They had held off on easing too quickly: South Korea had worries about financial stability due to high levels of household debt, Indonesia needs higher yields to attract foreign investors to fund a current-account deficit and South Africa wants inflation expectations at the midpoint of its target range.
Their decision to cut is an indication of pronounced fears of a deepening downturn and demonstrates the policy space that’s opened up since the Federal Reserve’s dovish tilt. Central banks in Australia, India and Russia are among those that have recently cut. Nigeria surprised in March with the first reduction in more than three years.
“Dovish surprises remain the trend at this point,” said David Mann, chief economist for Standard Chartered in Singapore. “Inflation is low and growth is clearly decelerating, albeit not rapidly, but the risks to the outlook are growing.” He projects global growth of 3.4% this year, down from 3.8% in 2018.
The biggest culprits dragging down the world economy are the US-China trade war, a fading technology boom and a soggy global autos market. China data this week showed second-quarter growth was the weakest since the early 1990s while business and consumer confidence globally is depressed.
In Asia, there’s almost daily evidence of economic pain. Japan said Thursday exports fell for a seventh straight month in June. Singapore’s shipments plunged to the second-worst rate since the global financial crisis, in line with weakening world trade.
Manufacturing purchasing managers’ indexes have been softer across Asia and in other regions. Factory activity shrank across Europe and Asia in June while the US teetered on the brink of contraction.
“Many Asian economies are at the leading edge of the global industrial cycle and policy rate cuts across the region reveals expectations that the current export malaise will endure,” said Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong.
What Bloomberg’s economists say
“The Bank of Korea and Bank Indonesia were among the last major central banks in Asia to join the easing club. Their cuts show that the policy focus has turned firmly to supporting growth, overriding earlier concerns over financial stability risk and currency pressures. The widely expected rate cuts by the Federal Reserve also makes monetary easing easier to pull off for Asian central banks.”
-Chang Shu, chief Asian economist
In Seoul, the Bank of Korea cut the seven-day repurchase rate to 1.5% from 1.75%. It now expects the economy to grow 2.2% this year, versus 2.5% projected in April, and inflation to rise 0.7%, versus 1.1% previously.
With the benchmark rate now only a quarter percentage point above a record low, and financial stability still a concern, BOK Governor Lee Ju-yeol said the central bank still has room to act again — but not much.
Indonesia’s central bank cut its benchmark rate for the first time in almost two years and pledged more easing to come as it shifts focus to supporting growth in Southeast Asia’s biggest economy. The seven-day reverse repurchase rate was lowered by 25 basis points to 5.75%, in line with the forecasts of most economists surveyed by Bloomberg.
“The region is in need of macro policy support, both monetary and fiscal, to stabilise growth amid ongoing trade uncertainties,” said Juliana Lee, chief economist for Asia at Deutsche Bank.
South Africa’s cut came as the central bank almost halved its growth forecast for the year to 0.6%. The MPC made it clear though that the move can only boost the economy if the government removes the underlying structural restraints.
Chile’s central bank, long known as one of Latin America’s more predictable monetary authorities, reverted to form Thursday by keeping borrowing costs unchanged. The pause comes a month after the bank delivered its first reduction in two years, surprising all 18 economists surveyed by Bloomberg.
Economists worry about how much space central banks have to cut, given benchmark rates around the world remain at historical lows after years of effort to support growth in the wake of the global financial crisis. At the same time there are concerns over how potent any rate cuts will prove given rising levels of debt. It means that central banks alone won’t be able to rescue their economies.
“For this, greater certainty around trade policy will be needed, as well as more accommodative fiscal policy among the world’s largest economies,” said HSBC’s Neumann.
© 2019 Bloomberg L.P.