Asia takes to rate cut trail, some fear fund flight

Singapore, Oct 3 : Most central banks in the Asia-Pacific region look set to follow the Federal Reserve’s lead and cut interest rates, but some have less room for manoeuvre given fears that investors might respond by shifting funds abroad.

The Fed on Tuesday cut the key federal funds rate by 50 basis points to the lowest level in nearly 40 years and said it was ready to act again as needed given the economic uncertainty generated by the September 11 attacks on the United States. “The Fed’s strong emphasis was on continued downside risks to growth. It doesn’t look like there is an immediate end in sight for the rate-cutting process,” said David Simmonds, currency strategist at Salomon Smith Barney in Singapore.

“I think that will encourage expectations that Asia, too, will continue on the monetary loosening path,” he said. Because of the currency peg linking the Hong Kong dollar to the US dollar, Hong Kong on Wednesday promptly matched the Fed’s move by cutting the base rate charged through its overnight discount window by 50 basis points to 4 per cent. The Reserve Bank of Australia also sprang into action, trimming its official cash rate by 25 basis points to 4.5 per cent. It was the bank’s fifth easing so far this year and had been widely anticipated.

Analysts also expect Taiwan to cut rates again, just as it followed the Fed’s previous easing by reducing three key interest rates by half a percentage point on September 18.

The Philippine central bank’s rate-setting monetary board has met four times since September 11 without cutting rates, citing inflationary concerns. But Socio-economic Planning Secretary Dante Canlas told Reuters he expected the bank to cut its overnight rates by at least 25 basis points on Thursday.

Central bank governor Rafael Buenaventura said the monetary board would take the Fed’s move into account when it meets.

— Reuters