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Asian central banks stand pat on rates, with limited space for further easing

Central banks across Asia-Pacific broadly held their monetary policies in the third quarter, and while financing conditions are expected to remain supportive for most regional economies, there may be limited room for lower rates.

Nominal policy rates in the region have neared either the "zero lower bound" or a level that central banks seem reluctant to push below, S&P Global Ratings wrote Sept. 24. That, coupled with declining inflationary pressures, will keep real policy rates from falling further.

More balance sheet action may be seen from central banks to support the real economy, including ongoing asset purchases and enhanced lending facilities, said the rating agency.

Central bank actions

The People's Bank of China maintained its one-year loan prime rate for the fifth straight month in September, as the world's second-largest economy led the recovery in the region.

The International Monetary Fund said Oct. 13 that China is seen growing at a 1.9% rate in 2020, compared with the prior 1.0% growth projection.

The pressure on the Chinese central bank to ease monetary policy further has been reduced, allowing it to work on mitigating financial risks, according to a Sept. 21 note from UOB Group Economist Ho Woei Chen, who expects the central bank to continue to hold rates into 2021.

The Bank of Japan left its monetary policy unchanged in September, a day after the country's parliament elected Yoshihide Suga as prime minister, as the economy showed signs of a rebound.

The BoJ is expected to maintain stimulus measures for the time being, with rates unlikely to go lower, Stefan Angrick, senior economist at Capital Economics, and Shigeto Nagai, head of Japan economics, wrote Sept. 17.

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The Reserve Bank of India held interest rates steady in August and October, as it announced additional measures to boost liquidity earlier in the month.

Maintaining rates for the two consecutive meetings suggests that the RBI easing cycle "has almost neared its limits," Prakash Sakpal, senior economist for Asia at ING, wrote Oct. 9, adding that no changes to the policy rate is expected in the foreseeable future.

India has the second-highest number of COVID-19 cases in the world more than 7.3 million as of mid-October which could hamper the nation's economic recovery. The central bank expects real GDP to contract 9.5% in the financial year 2020-21, with risks tilted to the downside.

"[A]ny additional monetary stimulus isn't going to be of much use for the economy," Sakpal said. "The confidence has to return first."

The Reserve Bank of New Zealand on Sept. 22 hinted that rates could move into negative territory by the end of the year, while signaling additional stimulus to boost the economic recovery.

However, markets do not price in negative rates until after 2020, according to an Oct. 12 note from Brown Brothers Harriman.

New Zealand officially fell into a recession after the economy shrank by a record 12.2% in the second quarter, marking the country's sharpest quarterly GDP decline on record.

Bucking the trend

Some Southeast Asian nations were exceptions to the broad trend of maintaining rates.

Bank Indonesia reduced its seven-day reverse repo rate by 25 basis points to 4% in July, saying the economy had not returned to pre-pandemic growth levels, even though economic activity had picked up. The central bank in August decided to pause on cutting interest rates in a bid to prop up the weakening rupiah, despite low inflation.

Bank Negara Malaysia in July delivered its fourth overnight policy rate cut, to 1.75%, before unexpectedly maintaining the rate in September as the economy continued to recover from the trough in April this year.

The State Bank of Vietnam on Sept. 30 cut its refinancing rate to a record low of 4.0% from 4.5%.