It is not all Fed: Domestic debt risks may spur more
Asia rate hikes
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[September 20, 2018]
TOKYO (Reuters) - Some Asian
economies running large external surpluses, including Thailand and South
Korea, might be forced to tighten monetary policy soon as high household
debt pose a bigger financial risk than the U.S. Federal Reserve's steady
pace of rate hikes.
Up until now, these two economies have been considered immune to the
Fed-driven rise in global interest rates, which have roiled currencies
in some emerging markets.
Now, though, they are facing growing pressure to return credit
conditions to more normal levels after years of cheap money have stoked
a domestic borrowing binge. In Thailand, for example, household debt has
been running high for years, spurring calls for higher rates to stave
off risks in the banking system.
Thailand's central bank held rates steady on Wednesday but said the need
for current easy policy would be "gradually reduced," reinforcing views
that it may soon start tightening for the first time in years.
South Korea's central bank is under political pressure to raise rates
amid a public outcry for policymakers to tackle soaring home prices,
which are leaving households strapped with debt and much less cash for
Many analysts expect South Korea's central bank, which stood pat in
August, to tighten once before the end of this year to track further
expected rate hikes by the Fed.
"Even in economies with solid current account surpluses, like Korea and
Thailand, central banks are gearing up for rate hikes in the coming
months," said Frederic Neumann, co-head of Asian Economic Research at
"After keeping monetary policy highly accommodative for many years,
there is a clear desire to normalize interest rates."
Strong external surpluses have insulated these economies from this
global trend so far, significantly reducing pressure on portfolio
outflows that have gripped deficit countries such as India and
But as rates rise faster than expected around the world, Thailand and
South Korea - which had not been on the radar for any interest rate
hikes this year - are now expected to follow sooner than previously
thought, potentially by December.
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U.S. dollars and other world currencies lie in a charity receptacle
at Pearson international airport in Toronto, Ontario, Canada June
13, 2018. REUTERS/Chris Helgren
To the extent that the pressure for higher rates is a sign of contagion, it is
only a mild one. The Korean won, for example, has weakened this year, but a 4
percent drop compares with double-digit falls in India, and sharp losses in
Indonesia and the Philippines.
That suggests the dollar's rise driven by the Fed, which hiked twice this year
and is expected to do so again at next week's meeting, is only part of the
The more compelling reason to act for the Thai and South Korean central banks is
rising household debt, even though external uncertainties such as escalating
global trade frictions could discourage policy makers from pulling the plug on
loose monetary conditions prematurely.
"As of now, we don't see many Asian central banks being forced into actions
because of the Fed," said Aidan Yao, senior emerging Asia economist at AXA
Investment Managers Asia.
"Overall, we think the domestic factors have so far outweighed the Fed in
influencing policy actions in Asia."
The Bank of Korea warned on Thursday that household debt was growing much faster
than the Organization for Economic Cooperation and Development average, as large
mortgages and high rents drive up indebtedness.
Two Bank of Thailand board members voted for a rate hike on Wednesday, arguing
that keeping borrowing costs too low could cause households and firms to
underestimate financial risks.
"Inflation is starting to go up, growth is strong and interest rates are at
extremely low levels," said Khoon Goh, head of Asia Research at ANZ.
"We expect them to hike interest rates in November, even though trade tensions
are simmering in the background."
(Reporting by Leika Kihara; Editing by Shri Navaratnam)
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