By Patricia Lui
Nov. 5 (Bloomberg) -- Asian central banks will lower borrowing costs further to cushion the region's economies from the global slump, trading in interest-rate swaps shows.
South Korea, Indonesia and Thailand reported slower inflation this week, and economists predict the Philippines and Taiwan to follow suit today. Central banks in Australia, China, Hong Kong, India, Japan, South Korea, Taiwan and Vietnam all announced rate cuts since the start of last week. Bank of Korea and Bank Indonesia will announce monetary policy reviews in the next two days.
``Governments will continue to prioritize growth over inflation,'' said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment banking unit of France's Credit Agricole SA. ``Swaps are already starting to price in some of the rate cuts with more to come.''
Asian stocks and currencies plunged in October on concern a global lending squeeze was tipping the world into recession, prompting investors to seek safer bets than assets in export- reliant developing economies. The MSCI Emerging Markets Index of stocks and the Bloomberg-JPMorgan Asia Dollar Index, which tracks the region's 10 most-active currencies excluding the yen, both posted their biggest monthly drops in a decade.
South Korea's one-year interest-rate swap will decline to 3.4 percent by the end of March when the central bank's benchmark rate is likely to have fallen to 3 percent, according to James Lee, an economist with JPMorgan Chase & Co. in Seoul.
Swaps Decline
The swap rate fell to 4.66 percent yesterday, the lowest since December 2006, and the Bank of Korea last week lowered its seven-day repo rate by a record 75 basis points to 4.25 percent at an emergency board meeting. A basis point is 0.01 percentage point.
In an interest-rate swap, two parties agree to exchange fixed payments for variable-rate payments over a set period. Typically, one agrees to pay a fixed rate, while the other pays a rate that fluctuates with a benchmark index or formula defined in the contract.
``The swap market is pricing in expectations about rate cuts and government measures to funnel funds into financial systems,'' JPMorgan's Lee said. ``A thawing in money markets is causing a rally in short-end rates, leaving the door open to further declines in the swap rates.''
The Bank of Korea's monetary board next meets in two days time to review rates and economists surveyed by Bloomberg predict a further 25 basis point reduction in the benchmark rate.
Rate Cuts
``Certainly, the bias is for Asian central banks to cut policy rates to boost their economies,'' said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore.
Six months ago, Asian central bankers were jacking up benchmark borrowing costs as inflation accelerated on surging costs for oil, food and commodities. That changed as the U.S. credit crunch snowballed into a global financial crisis, curbing lending and causing raw-materials prices to tumble.
South Korea's October inflation of 4.8 percent was the slowest in six months. Indonesia's consumer prices increased 11.8 percent from a year earlier, the smallest gain in four months.
``The data will provide room for Bank Indonesia to cut rates this Thursday,'' said Joanna Tan, an economist at Forecast Singapore Pte Ltd. ``We are looking for a 25 basis point cut, if not this Thursday, then definitely at the next meeting. It's hard for Bank Indonesia to ignore the plethora of global interest-rate cuts.''
Indonesia, Thailand
The central bank raised its key interest rate by 150 basis points since May to 9.5 percent to curb inflation, most recently adding a quarter of a percentage point on Oct. 7. Policy makers, who will again review policy tomorrow, may lower the benchmark rate to 8.5 percent over the next six months, Tan forecast.
Indonesia's one-year interest-rate swap was 11.63 percent late yesterday, having reached a two-year high of 12 percent on Oct. 29. The rate stood at just 6.5 percent at the start of the year when the benchmark policy rate was 8 percent.
Thailand's one-year swap rate was 3.39 percent late yesterday, down from 4.75 percent at the end of June, the highest close of the year. The government reported an inflation rate of 3.9 percent for October, the lowest this year.
``Thailand's inflation particularly signals interest-rate cuts ahead,'' Calyon's Barbe said.
The Bank of Thailand ``has room'' to ease monetary policy, Governor Tarisa Watanagase said on Oct. 24. The Thai central bank left its one-day bond repurchase rate at a 16-month high of 3.75 percent at its last policy meeting on Oct. 8, after announcing quarter-point increases at the two previous reviews in July and August.
Philippines, Taiwan
The Philippines and Taiwan may today also report that consumer prices increases are moderating.
Philippine inflation slowed to a four-month low of 11.4 percent in October, according to economists surveyed by Bloomberg ahead of a government announcement at 9 a.m. in Manila. The consumer price index in Taiwan rose 1.3 percent from a year earlier, the smallest gain in more than a year, a separate survey showed. The report is due at 4 p.m. in Taipei.
To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net
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