Asia seen gaining little if Fed cuts rates again

Andrea Ricci

Further interest rate cuts expected from the US Federal Reserve won’t offer much help to Asian economies struggling with the gloomy global environment, analysts said on Monday. “I think the risk is that the interest rate cuts don’t have much effect (in Asia),” said Rob Subbaraman, regional economist at Lehman Brothers in Tokyo.

After last week’s devastating attacks in US, the Fed is expected to cut rates aggressively to keep liquidity flowing in the financial markets and boost confidence. Some economists were betting the Fed would ease as early as Monday as US stocks resume trading for the first time since Tuesday.

Easy justification
There was justification for more rate cuts even before the attacks. “On a fundamental basis, all economists have now taken stock of what we’ve seen pre-September 11 and, I think it is important to note, all of the signs were of the US tipping toward recession in the first place,” David Fernandez, vice president at J P Morgan Chase. J P Morgan is now forecasting the US economy will contract by 1% in the third quarter and 1.5% in the fourth.

Further contraction in the first quarter of 2002 is quite possible. Industrial production fell for the 11th straight month in August and a consumer sentiment survey showed confidence at its lowest in eight years. Mr Fernandez said he didn’t believe the Fed was in a hurry to cut rates, but would ease the federal funds rate down to 2% by year end from 3.5% now.

Lehman Brothers’ Mr Subbaraman said his firm expected the Fed to cut rates by 50 basis points at its October 2 policy meeting and possibly by another 25 basis points in November or December. Meanwhile, in Japan, speculation is rife that the Bank of Japan will further loosen its already super easy policy after regular policy meeting on Thursday.

Asia effect
Whether the rate cuts actually help Asia’s economies is more in doubt. The cuts could support fragile sentiment and improve liquidity. “Interest rate cuts affect economies mainly through bank lending and many of the countries in Asia still have very weak banking systems. So I think it is fair to say that the interest rate channel may not be as strong as it has been in the past,” said Mr Subbaraman.

In the longer term, it is a question of when demand for Asian exports picks up, especially from the US. And that, it seems, could be a long way off.

— Reuters