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South Korea’s central bank raised interest rates Friday for the first time since Lehman Brothers collapsed. Call it Australia envy.
Australia, whose economy is tightly linked to developing Asia, has been one of the few countries in the world to aggressively lift interest rates from crisis levels. It has launched six rate hikes since October 2009, bringing its benchmark rate from 3% to 4.5%. That gives Australia's central bank chief Glenn Stevens plenty of room to cut rates and stimulate the economy if a global double dip recession actually does materialize.
Now several Asian countries are starting to play catch up with Australia.
– South Korea is the latest to join the hikers club. It surprised markets Friday by raising its benchmark rate a quarter of a percentage point to 2.25%., its first hike since the financial crisis.
– Malaysia hiked its rates for the third time this year on Thursday.
– Taiwan surprised economists when it raised rates June 24, also the first time it has moved since the global financial crisis began.
– And in protest-prone Thailand, its incoming central bank governor said this week he expects rates to start going up there in August and rise by three quarters of a percentage point by the end of the year. Several Asian central banks including those in China, Indonesia, Thailand, and the Philippines, have yet to raise rates at all since the financial crisis despite generally robust growth, near full employment and rising inflation. China has raised banking reserve requirements, moves it can reverse should a slowdown become severe.
Hiking rates into a possible economic slowdown seems counterintuitive. But in the case of Asia, it might be a good policy. The stated explanation from most of the central banks is that despite Europe’s woes, economies here are doing quite well, so a return to interest rate normalcy, is well, normal. A few little tweaks from record low rates are unlikely to cause a sharp slowdown. And because China is now letting its currency rise, other regional central banks don’t have to worry that rate hikes, which tend to lead to stronger currencies, will make their exported goods more expensive compared to China’s.
Then there's Australia envy.
A “possible motivation for the rate hikes we have seen in recent weeks is that this will provide scope for rate cuts later on if growth turns out to be weaker than expected,” notes Brian Jackson, Senior Emerging Markets Strategist Royal Bank of Canada in Hong Kong.
It also goes to show that should a global slowdown materialize, developing Asia and Australia are in better shape to respond than the U.S., Europe and Japan, all of which are unlikely to raise rates for a long time. Asia will have room to stimulate local economies with rate cuts, while the major developed economies will continue to search for non-traditional monetary tools.
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