It was “steady as she goes” for central banks in Asia this week with no move on key interests rates in Australia, India, Japan and South Korea, four of the biggest economies in the region.
If you looked at the way stockmarkets in the region are rising, the lack of any rate cut was easy to understand.
But if you looked at the way the various economies are performing and the weak outlooks at the moment, you’d say a rate cut was justified.
Only India, where the economy still seems to be solid a year or more after the election of Prime Minister Modhi, didn’t really justify a rate cut seeing it’s already had two this year (which came out of the blue).
All four central banks chose to wait and see what impact previous policy moves have on the respective economies, although a couple of countries could have justified rate cuts.
The decision by the Reserve Bank of Australia to sit on its cash rate at a record low of 2.25% is well known here.
Some economists are apparently still finding it hard understand the decision – they should get out a bit more and look at what’s happening in the real economy and not just financial services.
Home building is supporting the wider economy at the moment, with some help from household spending and consumption, but exports are weakening (especially iron ore) and investment is easing.
The Bank of Korea was the last to meet and yesterday held its key interest rate steady, a month after cutting the rate to a record-low 1.75%.
The case for another monetary easing in South Korea is clear: growth is slowing, Korean inflation is at a 16 year low and unemployment is running at 12 month high.
Solid exports are about the only bright spot, but even those are not as vibrant as the government, business or the central bank would like.
But household debts on the rise and South Korean consumers are not happy and are not spending, despite receiving a bonus (like consumers in many other countries) from lower petrol prices.
The rising level of household debt could make the central bank reluctant to cut again.
The Indian economy is the best performing of the four at the moment after two surprise cuts earlier in the year
So it was probably for that reason that the Reserve Bank of India (RBI) held its benchmark rates steady, following the two unscheduled rate reductions in the bank’s key rates.
On Tuesday the RBI held its key repurchase rate at 7.5%, while the cash reserve ratio was unchanged at 4%, as was the reverse repo rate at 6.5 %.
The RBI had cut the repurchase rate twice this year, in January and March, at unscheduled meetings on both occasions.
The RBI said this week it wanted to wait and see if its policy moves translate into altered lending rates from the banks themselves – who have been very slow to reduce their lending rates, while the Financial Times and Reuters reported that only 4 of the 47 major Indian banks have adjusted lending rates so far this year.
And the Bank of Japan left its interest rate and policy approach unchanged this week at basically full bore ahead as the huge bout of bond buying (quantitative easing) continues in an effort to drag the economy out of its deflationary rut.
In some respects it is working as exports continue to pick up, but industrial output and retail sales remain weak and business confidence isn’t upbeat.
And core inflation is likely to be back to zero per cent this month.
But the Tokyo stockmarket is booming, having hit a series of 15 year highs this week.
Stockmarkets in Australia, China, New Zealand, Hong Kong and the Philippines are also performing at or near record highs at the moment, despite sluggish economic growth and weak outlooks for the rest of the year.
