Asia’s Central Banks Need to Do More to Boost Growth, Say Economists
Asian markets fell on Thursday amid growing worries about global growth after China’s factory sector contracted for an eighth straight month, with economists telling CNBC it’s time for Asian policymakers to do more to boost growth.
On Wednesday, the U.S. Federal Reserve decided to continue to ease monetary policy by extending Operation Twist, under which it buys longer-dated bonds and sells shorter-dated ones, till the end of the year.
But the move, on top of rate cuts by China and Australia in recent weeks, hasn’t been enough to stem concerns about slowing growth, with investors selling stocks and seeking safe-havens. On Thursday, the Hang Seng Index and Australia’s ASX/S&P 200 closed down over one percent.
“I think Asian central banks are being slightly conservative at the moment,” Glenn Levine, Senior Economist with Moody’s Analytics in Sydney, told CNBC. “Korea and India should probably cut rates…The Chinese? Yes, they can and they should and indeed they will.”
Asia is highly dependent on exports to the West and is already feeling the knock-on effects of slowing growth in Europe and the U.S.
An early reading of China’s manufacturing activity in June from HSBC showed a contraction on Thursday, with the export orders sub-index dropping sharply to 45.9, the lowest level since March 2009.
With the Federal Reserve and the European Central Bank having already eased policy, some economists say they are running out of ammunition.
“The West really has no scope to ease anymore,” Robert Prior-Wandesforde, Credit Suisse’s Head of India and South East Asia Economics told CNBC. “And the biggest worry would be that Asian central banks would be a bit reluctant to cut fiscal policy because they eased too much in the previous crisis.”
China is perhaps the best example, where authorities massively cut interest rates and eased policy in 2008, causing a property price bubble that they are now trying to deflate, Prior-Wandesforde added.
Vishnu Varathan, Mizuho Corporate Bank’s Regional Economist in Singapore, said central banks should not be too ‘hawkish’ about cutting rates because inflation has come off previous highs.
“Even if growth in the region is still fairly healthy, it is below-trend in most places,” he wrote in a report in April. “And despite upside risks from oil, inflation is generally well-behaved.”
P K Basu, Maybank Kim Eng's Regional Head of Hesearch and Economics, agrees, adding that investors looking for more Fed action will likely be disappointed and that they should look to Asian central banks instead.
“I think what will have a bigger impact is easing by central banks in Asia,” he told CNBC. “India did not cut its policy rate this month, but the Reserve Bank of India did ease conditions for exporters, which is equivalent to a 50 basis point cut of the (cash reserve ratio). We think there may be more easing from Thailand, given inflation and capacity utilization are low.”
But for now, central banks in Asia do not need to be more aggressive, he said, unless conditions in Europe deteriorate “substantially further”.
- By CNBC's Jean Chua.