Central banks in emerging Asia that are struggling to revive growth and keep their financial systems stable are facing new risks as their counterparts in Europe and Japan plunge deeper into uncharted policy territory.
The Bank of Japan in February joined several European central banks in turning policy on its head with a radical prescription of negative interest rates to revive flagging economies, prompting calls from emerging markets for some form of global coordination to avoid a race to the bottom for rates and currencies.
Concerns about potentially destabilising spillovers into the rest of the world are likely to be a key talking point over the coming week as central banks in Indonesia, Thailand, the Philippines and Taiwan hold policy reviews.
All four central banks have seen volatile swings in their currencies and stock markets over the past year as the world’s major central banks have taken markedly divergent policy paths.
Yesterday, Bank Indonesia cut its benchmark interest rate by 25 basis points to 6.75 per cent, its third straight reduction of that size this year as it tries to lift sluggish economic growth.
While many Asian economies have strengthened their defences since the 1997/98 regional financial crisis, they remain vulnerable to sudden capital outflows.
Reserve Bank of India governor Raghuram Rajan, a critic of the massive stimulus rolled out in developed economies, has called on global central banks to adopt a system for assessing the wider impact of unconventional monetary policies.
“It seems fair to say that the benefits seem to be diminishing after years of effort, and the costs increasing,” Mr Rajan said at a three-day International Monetary Fund (IMF) event in New Delhi.
Low rates have created problems for savers around the world, and debt levels are continuing to rise to unsustainable levels from China and Japan to Europe – feeding fears of a fresh blow to the global economy from financial market dislocation.
Mr Rajan’s concerns were echoed by his peers in emerging markets such as Indonesia and Malaysia, but few if any in the region expect the likes of the European Central Bank (ECB) to give priority to any nasty side effects for other economies when setting policy.
“The potential for this (to manage economic crises) is becoming more and more limited as monetary policy rates have already trended closer to zero and quantitative easing is becoming more significant,” Bank Negara Malaysia governor Zeti Akhtar Aziz said.
She said there is a need for greater policy coordination among countries to prevent over-reliance on monetary policy.
Mr Juda Agung, Bank Indonesia’s executive director for monetary and economic policy, agreed. “A low-yield environment encourages excessive risk-taking behaviour. At the end, the credibility of the central bank is at stake,” he said.
Mr Frederic Neumann, co-head of Asian economic research at HSBC, said that emerging economies are right to raise a voice of caution over unconventional policies.
“Policymakers are backpedalling because it’s not entirely clear what the benefits of negative rates would be,” he said, referring to ECB president Mario Draghi’s suggestion last week that further rate cuts were probably off the table.
Indeed, a recovery in the euro zone has flagged over the past year and deflation looms large, while Japan’s economy is teetering on the brink of its fourth recession in five years. The IMF has cut its global growth projections for 2016 and 2017, with a slowdown in China rippling across producers of oil, cars and a range of consumer products.
