(Bloomberg Opinion) — Far from upending the policy landscape, the Federal Reserve’s emergency interest-rate cut Tuesday encourages Asian officials to keep at it. Rates have been coming down across the region for the past year, first because of the trade war and now thanks to the coronavirus. Feet were already on the gas pedal; the Fed merely gives local central banks cover to accelerate.
The race toward zero borrowing costs — save Japan, which was already there — is on, and there’s no going back. That’s in large part because policymakers were already on the road . Inflation is well below target in many countries. China, the region’s patron, was in a long-term economic slowdown before the virus hit. Now, its performance this quarter is likely to be the worst ever. There’s little appetite for rates to climb, even after the virus is contained. I’m not hearing many people call the current steps temporary.
The Federal Open Market Committee’s dramatic half-point cut focuses attention on a global response to the virus. Few want to be left out and many will cite it as a reason to pick up the pace. For anyone wavering, the consequences of standing pat are more dire than any risk of acting: Chief among them, currencies will appreciate relative to the dollar, making exports less attractive. Given the existing strain on global supply chains, the building block for Asia’s economic ascendance, few officials want to burden their economies with additional costs.
What happens at zero? Measures once seen as the preserve of northern industrial rust-belt economies become palatable in places where the prospect of quantitative easing once seemed unthinkable. In a world where capital, goods and people move relatively freely — let alone infections — there are no islands.
That brings us to Sydney, where the Reserve Bank of Australia cut its benchmark rate to a record low of 0.5% and foreshadowed further easing. In some respects, Tuesday’s reduction pre-announced QE. One more quarter-point cut and the RBA is at the threshold of unconventional measures.
Did I say unconventional? Bond buying has become thoroughly mainstream in large parts of the Western world. It will come as a shock to many Australians, drunk on their own propaganda about the three-decade run without a recession, that they aren’t immune from swings in the global economy. Unconventional, to mean anything in today’s monetary world, needs to become still more exotic.
In the meantime, other regional central banks have been busy deploying the tools they’ve got. Bank Negara Malaysia reduced rates Tuesday, the second cut this year. The U.S.-China trade conflict sliced growth in 2019 and officials spent much of last year insisting they won’t let deflation take hold. Malaysia is also in the throes of a political crisis that certainly won’t hasten growth. Bank Indonesia has also been active, reducing reserve requirements for banks Monday. Both countries are deploying fiscal policy as well.
Expect more monetary easing in South Korea, Thailand and the Philippines. The latter two have already moved this year. Dissenting votes against the Bank of Korea’s shock decision last week to stand pat suggest it won’t be long before that mistake is corrected. China, which has been easing since 2018, isn’t about to stop.
The Fed isn’t the catalyst to all this: Increasingly, Asia marches to local drums. But thanks to its status as the most powerful independent monetary agency and the dollar’s might as the planet’s reserve currency, the Fed’s cut will accelerate things.
The message from Washington is to keep up the good work and step it up, if you can. The great news is that the region only needs a nudge, not a shove.
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