Asia’s Central Banks Will Watch, Not Follow Fed

Asia’s central bankers are unlikely to take their cue from any monetary stimulus the U.S. Federal Reserve delivers on Thursday - instead they are expected to hold their fire power and use it on any further signs of economic weakness at home or abroad.

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South Korea’s central kept its benchmark interest ratesteady at 3 percent on Thursday, surprising financial markets, which had anticipated a quarter point cut, to give it more time to see how the euro zone bond crisis plays out and impacts the outlook for exports to Europe.

“The Bank of Korea is expected to downgrade its growth forecasts next month, so this will provide a window for the central bank to cut interest rates,” Ronald Man, Asia-Pacific Economist at HSBC, told CNBC Asia’s “Squawk Box.” “If you look at the recent economic data, they all signal a sustained deceleration in the coming quarter at least,” he added.

South Korea’s export-driven economy grew just 0.3 percent in the second quarter, down from 0.9 percent in the previous quarter, while more recent data showed exports tumbled 6.2 percent in August from a year earlier. Faced with deteriorating economic growth, the Bank of Korea slashed rates in July – its first move since the 2008-09 financial crisis.

It is not the only central bank grappling with a flagging economy: The Federal Reserve is widely tipped to delivermonetary stimulus later on Thursday with a third round of quantitative easing (QE) or asset purchases to help revive the U.S. economy and boost weak employment growth.

While the Fed is a focus in Asia, analysts say the picture is somewhat mixed. This is partly because central banks in the region are also weighing up European developments, not to forget policy moves in China, the world’s second largest economy, which over the past week has stepped up its own efforts to underpin a weakening economy.

No Need for Haste

The other reason is that strong domestic demand in some Asian economies such as Indonesia and Malaysia mean there is no need or rush for monetary easing.

Indonesia's central bank kept its benchmark interest rate steady at a record low of 5.75 percent for a seventh month in a row on Thursday, while interest rates in the Philippines were also on hold at 3.75 percent.

But economists forecast the Philippine central bank to cut borrowing rates before the end of the year to help cushion the local economy from weaker growth globally.

“They will act on a mixed basis. We can’t lump the Southeast Asian countries together anymore,” Kelvin Tay, Regional Chief Investment Officer at UBS Wealth Management, said in response to a question about what impact any Fed monetary easing will have on Asian central banks.

“Malaysia and Singapore are slowing down but on the whole I don’t think there will be a huge amount of stimulus coming through for this region. In the sense, the economies are slowing down but they are not on the verge of falling off a cliff,” he said.

Economists expect Singapore’s economy to grow 2.4 percent in 2012, down from a median estimate of 3 percent previously, a survey released by Singapore’s central bank showed on Wednesday.

In Malaysia meanwhile, the central bank left monetary policy on hold last week for the eighth time in a row, saying that strong domestic demand was helping to support the economy.

“They could start shifting their priorities towards growth away from inflation but they are not likely to be heavy handed about moving their policies towards growth,” Lau said, referring to central banks in Southeast Asia.

John Wood, Chief Investment Strategist at Citi Private Bank said any impact on Asian markets from Fed easing was also likely to be limited.

Equity markets in Asia have gained about 13 percent since hitting a low in June, driven higher by anticipation of more monetary easing by the Fed and hopes of action by Europe’s policymakers to end the debt crisis.

“What we’ve noticed over time is that QE has had a diminishing impact, particularly on Asia. QE1 was great, QE2 less so and our sense is that if we have a QE3 initiative it’s likely to have a slightly more temporary effect and any rally is likely to be somewhat diminished,” Wood said, referring to the first round of quantitative easing that took place in March 2009 and the second round, known as QE2, in August 2010.

“Our focus is on China and the point at which the economy bottoms, which will have a bigger impact on Asian markets,” Wood added.

- By CNBC's Dhara Ranasinghe