Asia’s central bankers should consider themselves lucky: Unlike their counterparts in the West — with a few exceptions — they have the scope to combat an economic downturn and low inflation through traditional tools. What they may lack, though, is the will to use those assets en masse rather than the ad hoc efforts to date.
India made a surprise down payment in February, when the Reserve Bank cut interest rates and signalled a few more steps. China has used fiscal and monetary policy. The People’s Bank of China began before the Federal Reserve even heard the words “dovish pivot”; Mario Draghi, head of the European Central Bank, was still trying to wrap up quantitative easing. That’s fitting. China’s slowdown is a big — if not the biggest — cause of global growth anxiety.
Beyond India and China, the slackening in economic activity has been met by extreme caution in much of Asia. Rate hikes, de rigueur when the Fed was nudging borrowing costs up every quarter, have subsided. A predilection to tighten has been replaced by qualified verbal dovishness.
The ability to ease is there. To an extent, the argument that central banks have little ammunition left is a Western conceit or at least an affectation of developed nations. Consider benchmark rates in Southeast Asia: In Malaysia, 3.25 per cent; Indonesia, 6 per cent; the Philippines, 4.75 per cent.
In South Asia, even after February’s cut and a follow-up reduction a few weeks ago, India’s main rate is 6 per cent. In a series of articles the past few weeks, Bloomberg Opinion columnists in the US have contemplated what course central banks can pursue when the next recession strikes. The pieces have focused on the Fed’s choices and constraints, given rates are still low and balance-sheets loaded with assets bought to combat the 2008-09 crisis.
Setting aside Japan, the terrain in much of Asia is different. “We still have the policy space,” Shamsiah Yunus, governor of Bank Negara Malaysia, said to me last month.
China has so far have been reluctant to touch its main rate, instead opting to slice banks’ reserve-requirement ratio, which now stands at 13.5 per cent.
If Asia’s issue is willingness rather than ability, the question is why. Certainly, conservative forecasting plays a part as does disbelief that the Fed shifted so comprehensively from hawkish to dovish on such short notice. That inspires fears that their currencies are vulnerable.
Throw in a desire to see the details of a trade-war ceasefire and whether China or the US can steady their economies on a sustained basis. In other words, much of Asia wants someone else to save the day. Having ammunition is one thing, the preparedness is another. But there’s a third factor: the ability to affect outcomes.
The most important thing for emerging market growth is the state of the global economy. That, in turn, is influenced primarily by the big economies in the northern hemisphere. Local impact can be cushioned, not eliminated.
If the next recession is deep, the developing world may just have to wait for the storm to blow over.
This will have to be calibrated carefully. Although inflation isn’t at the same low levels encountered in the bigger economies, the broad phenomenon of slowing price increases is present. The differences with Europe and North America are of degree, not kind.
Monetary policy challenges in Asia are multiple. In most cases, officials have the firepower. A willingness to act is the critical secondary question.
Asia, and for that matter the world, won’t know until its central banks go all in.