Asian central banks have a common problem

SINGAPORE : Asian central banks are using tailored policies to combat the threat from a flood of easy money, keen to avoid interest rate rises given that headline inflation and economic growth are expected to ease.

Many economies are awash in easy funds as central banks buy dollars generated by regional balance of payments surpluses which otherwise would push up the value of their local currencies.

To deal with the nagging problem, China and India have forced commercial banks to park more money with the central bank. South Korea and China are encouraging locals to invest more abroad, while Thailand has adopted more severe measures by placing curbs on foreign money entering the country.

“I think policy makers are looking for more direct means and direct tools to try to control liquidity,” said Rob Subbaraman, senior economist with Lehman Brothers in Hong Kong.

“The problem with raising interest rates is that it affects the overall economy, so maybe it’s not the appropriate policy given that inflation is so low and generally there is a concern about the export outlook.”

Only Indonesia and Thailand have cut interest rates in emerging Asia since a record-breaking rally in oil prices fuelled inflation globally and forced central banks to tighten monetary policy.

The cash flowing into banking systems has led to a surge in lending that central banks fear could find its way into the property or stock markets, sparking asset bubbles.

“Consumer inflation is likely to stay benign in the region, but the main concern is that serious asset-price inflation may occur,” said Wang Qing, economist at Bank of America in Hong Kong.

Indeed, the rush of money into financial systems is becoming more of a priority for many central banks.

“Liquidity has become more of an issue for China than inflation and even the Philippines is concerned about rapid money supply,” Subbaraman said.

The Bank of Korea raised the reserve ratio on banks’ short-term deposits in November to try to stabilise real estate prices.

The Reserve Bank of India, frustrated by the failure of successive interest rate rises to put a brake on the bank credit fanning a property boom, changed tack in December by raising bank reserve ratios.

Central banks are more confident now that inflation is set to ease because oil prices have tumbled about 30% from July’s record high of $78.40 a barrel.

Many economists expect average inflation in Asia this year to moderate from an estimated 2.5% last year.

But falling oil prices have also helped push up trade surpluses in many export-orientated countries, exacerbating the problem of excess cash.

Asia’s external surpluses are unlikely to ease this year in the absence of effective methods to tackle global economic imbalances, analysts say.

Few economists believe China’s trade surplus, which jumped 74% last year to a record $177.5 billion, will narrow any time soon given how attractive the country is as a base for global factory production.