Asian central banks urged to raise rates

MANILA, Philippines - Asian central banks have kept interest rates too low for too long and it is high time to raise them now as the US prepares for the unwinding of its stimulus measures, an investment bank warned.

With too loose monetary policy, Nomura said the region risks a repeat of the 1997 Asian financial crisis and “falling into the same trap” as the US and Europe, years before the 2008 global financial downturn.

“Not raising policy rates has been justified as insurance against the tail risks to global growth and to avoid attracting too strong capital inflows, but it has led to growing financial vulnerabilities,” Nomura said on its Asia Economic Monthly report.

Financial cycles could turn bumpier, Nomura said, once the US Federal Reserve starts tapering off its $85-billion bond buying program which has flooded the world economy with money, most of which found their way to Asia.

Foreign investors, who would likely return to the US on signs of higher interest rates, would still look at Asia, particularly on those countries that post “sustainable growth.”

The Philippines and Taiwan stood at the “low risk category” of a macroeconomic crisis, followed by Japan, while Indonesia is at the “lower end of the high risk category.”

At the higher end of the countries at high risk are Malaysia, Singapore and Thailand, while those in “danger-zone category” are China, Hong Kong and India.

One reason for the Philippines’ “resilience,” Nomura said, is its strong private consumption and government spending which would likely sustain economic expansion at above-seven percent level for the rest of the year.

Economic growth hit 7.8 percent in the first quarter. It likely slowed to 7.3 percent in the second quarter and this quarter, and further to 7.1 percent in the last three months of 2013, according to Nomura’s estimates.

“The main risk to our forecast is a weakening of global growth. An unwinding of the Fed’s stimulus is another risk, but we would expect the Philippines to emerge resilient,” it explained.

The Bangko Sentral ng Pilipinas (BSP), which has kept policy rates at record-lows since October last year, could be “at the end of easing cycle” as it focused on inflationary pressures that comes with strong growth.

The BSP, it said, could also not allow more funds to flow out of the system by slashing anew the rate of its special deposit account (SDA) facility, the return of which was already slashed by a total of 150 basis points this year.

SDA is a macro-prudential tool targeted at siphoning of excess domestic liquidity which could stoke inflation. For the past months, the BSP slashed the SDA rate to encourage money supply growth.

Across Asia, the Japan lender urged central banks to begin raising interest rates and not rely on macro-prudential tools, to contain credit booms and bust.

“These tools risk lulling central banks into a false sense of believing that policy has been sufficiently tightened only to find out that, over time, these tools have turned out to be a poor substitute for higher interest rates,” it explained.

“Macro-prudential tools are not the Holy Grail,” Nomura said.

“We worry that policy horizon has become too short term, focusing on loose counter-cyclical policies at the expense of supply-enhancing structural reforms,” it said.