The end of the Federal Reserve’s second round of quantitative easing this week will have little impact on Asia as the highly accommodative monetary policies in the region mean there's likely to be plenty of liquidity to support economies, according to HSBC.
"Sure, the monetary stance is a little more constricting than during the depth of the global financial crisis, as it should be, but it remains much more supportive relative to virtually any other point over the last decade," Frederic Neumann, Co-head of Asian Economic Research at HSBC, said in a research note Wednesday.
Monetary policy in Asia remains easy despite accelerating inflation in a number of countries, according to a chart attached in the research (see below). The chart, which is a weighted index of nominal effective exchange rates for currencies and short-term interest rates, shows monetary conditions for Asia ex-Japan neither tightening nor loosening (black line).
But Neumann notes that if China is excluded from the analysis (red line), monetary policies in emerging Asian economies are extremely loose and these countries have experienced "no net tightening over the past year."
That interpretation may surprise investors given rate hikes across the region over the last 12 months. But Neumann says, even as benchmark rates have risen, short-term market rates have not increased to the same extent. The fact that emerging Asian currencies have not appreciated much against their main trading partners of late have also exacerbated the lack of tightening, he adds.
According to the note, monetary conditions need to tighten significantly in Philippines, Indonesia and Singapore. In the case of China though, current interest rates are near the neutral rate, at which monetary policy neither restricts nor boosts growth. On the other hand, in the case of India, benchmark rates need to rise another 50 basis points.