Asian Central Banks Cut Rates to Counter Impact of U.S. Crisis

By Shamim Adam

Sept. 27 (Bloomberg) -- Asia's central banks have started to cut interest rates, judging they need to counter the effect of the U.S. financial crisis on their export-dependent economies as inflation peaks.

Taiwan cut borrowing costs on Sept. 25, joining China, Australia and New Zealand in easing the price of money this month. Inflation rates have slowed in Thailand and Sri Lanka, and policy makers in the Philippines, India and Indonesia forecast price gains will cool before the end of the year.

Lower borrowing costs may spur growth as the economies of the U.S., Europe and Japan weaken and the deepening credit crisis threatens to tip the world into a recession. Still, some analysts say the inflation fight isn't over and that loose monetary policy or a surge in oil costs may spark another bout of higher prices.

``The bias may be shifting too quickly to growth and that is not wise,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``It's too early to declare victory over inflation.''

The credit crisis led Lehman Brothers Holdings Inc. to file for bankruptcy and prompted the sale of Merrill Lynch & Co. to Bank of America Corp. this month. U.S. regulators have seized at least nine lenders since July, including Washington Mutual Inc. yesterday, the fastest pace in 15 years.

While the contagion from the turmoil isn't likely to infect Asia's banking systems, the credit crisis is hurting exports.

Fewer orders for made-in-Asia goods are cooling industrial production in China, Singapore and Taiwan among others. Bank of Korea official Kang Myung Hun, who opposed a rate increase last month, said the nation's slowing economy is more of a concern than accelerating inflation.

Growth Forecasts

Merrill Lynch & Co. this month cut its forecast for Asia's growth in 2008 and 2009. The region will expand 7.7 percent this year, and ease further to 7.3 percent in 2009. Both forecasts were reduced from previous predictions of 7.9 percent growth.

``The U.S. is deteriorating and investors are increasingly pessimistic about the European economy,'' said Tomo Kinoshita, chief economist for Asia outside Japan at Nomura Holdings Inc. in Hong Kong. ``These are major destinations for Asian exports, and the implications of slower growth cannot be ignored.''

Taiwan's central bank unexpectedly reduced interest rates 12.5 basis points to 3.5 percent on Sept. 25, saying the global financial crisis had heightened the risk of an economic slowdown.

The People's Bank of China reduced its one-year lending rate to 7.20 percent from 7.47 percent on Sept. 15 and Australia's central bank lowered borrowing costs on Sept. 2, its first reduction in seven years.

In Malaysia and Sri Lanka, central bank officials refrained from raising rates even as inflation accelerated to the highest in decades.

Philippines, Indonesia

The Philippine central bank may not need to raise interest rates further as inflation may have peaked at 12.5 percent, Economic Planning Secretary Ralph Recto said Sept. 17.

Bank Indonesia's Deputy Governor Hartadi Sarwono last month said an interest rate of 9.5 percent may be ``adequate'' to slow inflation. The central bank's key rate is at 9.25 percent now.

``They're all pretty much done with raising interest rates, and those who didn't move probably won't have to,'' says Joseph Tan, chief economist for Asia at Credit Suisse Private Banking in Singapore. ``Asia needs to cushion against further downside risks to growth and guard against the fallout in the global financial system.''

Some economists are concerned the interest-rates cuts will rekindle inflation.

`Inflation Genie'

``Put the inflation genie back in the bottle now,'' said Asian Development Bank Chief Economist Ifzal Ali. Asia needs to ``tighten monetary policy even if it requires a temporary sacrifice of growth.''

Inflation in Asia will reach 7.8 percent this year, higher than an April forecast of 5.1 percent that was already the most in a decade, the ADB said. Prices may ease to 6 percent next year, it predicts.

``Lower rates will increase domestic demand and inflation pressures will start to kick in once again, exactly what central banks were trying to avoid in the first place,'' Lambregts said. ``It's a risky move and they'll pay a price for it.''

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net