By Daniel Moss
ALMOST ALL OF Asia’s central bankers have said the economic risks from the Wuhan coronavirus are significant. Then why aren’t they all taking action?
In a slew of interest-rate meetings last week, policymakers have been all over the map. Thailand surprised most economists by reducing rates, while the Philippines cut and India held, as anticipated. The Reserve Bank of Australia acknowledged the dangers to its commodities-heavy economy, but doesn’t appear to be in a much of a hurry to do anything about it. China quickly pumped liquidity into the financial system and lowered the money-market policy rate when trading resumed last Monday.
There’s a missed opportunity in this lack of a unified response, which could accelerate a recovery from any economic hit the virus brings. However, despite many shared characteristics — proximity to China, as well as dependence on tourism, investment, and supply chains — there are limits to policy integration. In the monetary arena, Asia doesn’t exist as a region the way Europe does.
Still, in the most extreme examples, some degree of coordination has been useful. For example, rates came down in the US, Europe, and China during the financial crisis of 2008. That commitment eventually stabilized markets and growth resumed. I’m not equating the virus to the Great Recession, but joint firefighting can be a big confidence-booster. Major powers also cooperated effectively to stabilize currency markets when Japan’s banking system cratered in 1998 and the euro crashed in 2000.
We’ll know the cavalry has really arrived if, and when, the Federal Reserve responds. As I wrote last week, the central bank should recognize that in an era of worrying about “global developments” — a key reason cited for its 2019 cuts — something that shuts down a broad swathe of China’s economy is a rather big one. The European Central Bank, meanwhile, has been circumspect. Peter Praet, a former top official, expressed concerns about acting prematurely in response to the virus: “What worries me probably more — the sort of perception you know, especially in financial markets, that central banks always have to react,” he said, adding, “There’s only so much a central bank can do.”
The caution is unfortunate, but understandable. Many central banks eased considerably in 2019 and it’s important not to make knee-jerk decisions. Borrowing costs are low and there’s something to be said for keeping powder dry for a truly dire scenario, like a recession or financial shock. But there’s also a case for acting quickly precisely because rates are low; if you allow a slowdown to take hold, even more monetary weaponry might be required. “Sooner the better,” Philippine central bank Governor Benjamin Diokno said in an interview with Bloomberg News last week.
In Australia, rates were cut three times last year to a record low 0.75%. RBA Governor Philip Lowe is now worried that more reductions will inflate asset prices just when things may have bottomed. In a series of speeches and presentations last week, Lowe signaled his preference for a period of masterful inactivity. But China accounts for 40% of global growth and is Australia’s biggest customer. Lowe says the virus is a bigger worry than the 2003 outbreak of Severe Acute Respiratory Syndrome, which almost halved Australia’s growth rate in the second quarter of that year. Pity he’s so reluctant to act.
After five rate cuts last year, the Reserve Bank of India has made clear that it’s uncomfortable with another cut amid an inflation spike. As a substitute, policymakers lowered lender reserve requirements and boosted money-market funding. Still, inflation has been declining in the major economies for decades and this spurt in India looks temporary. The RBI should be able to look past it. As I wrote last year, a collapse in growth is the bigger threat.
The good news is that some central banks appear to be learning their lesson. The Bank of Thailand has shown some nimbleness after moving too slowly last year to combat the strength of the baht. Governor Veerathai Santiprabhob made clear he isn’t done after Wednesday’s quarter-point reduction took the main rate to a record low of 1%.
What’s clear is that Asian policymakers aren’t sitting around and waiting for the Fed. They nevertheless could stand to pick up the pace. Given the weight of China’s economy, valor may prove the better part of discretion.
BLOOMBERG OPINION
