Post-Recession Economy Creating Problems for Asia's Central Banks

The post-recession economic environment is presenting new problems for Asia's central banks as they find ways to prevent inflation.

 

The Wall Street Journal reports that several of Asia's central banks will meet this week to decide on their interest-rate policies. But they are facing challenges. The Journal explains that Asia has traditionally waited for the U.S. Federal Reserve to act before tightening or loosening its own monetary policy. But the Fed isn't expected to significantly tighten money supply until later this year. This time, Asia can't wait as local currencies are being driven higher.

 

The Journal says stronger currencies make export goods more expensive on the world market. That could keep policy makers from raising rates as high or quickly as they otherwise should.

 

According to the Journal, the Reserve Bank of India today is expected to address inflation worries with some measure of monetary tightening. On Thursday, the Philippine central bank kept its benchmark rate unchanged and signaled that its tightening cycle has begun. Malaysia's central bank on Tuesday also kept rates steady. Meanwhile, Indonesia's top central banker noted that the country's recovery will "depend on the success of various exit policies in major countries as well as in Indonesian trading partners."

 

But acting alone carries risks, says the Journal, explaining that as U.S. rates stay near zero, each tick upward in Asian rates attracts more investors seeking higher yields. Those inflows of capital send currencies higher, making exporters less competitive. It can also spark asset bubbles, exacerbating the inflation that rate increases are meant to combat.

 

To prevent currency increases, South Korea, Taiwan and Thailand intervene in foreign-exchange markets by buying dollars, which can get expensive. China, meanwhile, has strict foreign-exchange controls and has kept its currency pegged to the dollar since mid-2008. That has China's neighbors keeping a close eye on its currency policy. "If China shows a willingness to do something there is an easy solution," Sanjay Mathur, economist for RBS in Singapore, told the Journal.

 

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