Impact of US rate hike minimal — ADB

MANILA, Philippines — Monetary policy normalization in the US is seen to have minimal impact in emerging Asia in the short term because of strong fundamentals and because it had been fully anticipated by the financial market, the Asian Development Bank (ADB) said.

In an entry in the Asian Development Blog, ADB economists Donghyun Park and Shu Tian said policy normalization is expected to continue amid robust growth, a strong labor market and weak inflation in the US.

The US Federal Reserve met market expectations when it raised its benchmark rates by 25 basis points to  between 1.25 percent to 1.5 percent.

“Over the short run, the rate hike will have limited influence on Asian financial markets,” said the authors. “The gradual, anticipated, and clearly communicated nature of the fed rate hikes, and the general absence of monetary tightening in the region, limit short-term impact of the US December rate hike on Asian financial markets,” the economists said.

The authors, noted that central banks in emerging Asia are “marching to their own beat” despite ongoing rate hikes in advanced economies following the Fed’s move.

ADB noted that some Asian central banks such as the Reserve Bank of India, Bank Indonesia, and State Bank of Vietnam lowered policy rates earlier this year to support growth.

ADB cut its 2017 inflation forecast for emerging Asia from three percent in April to 2.4 percent.

The Bangko Sentral kept its policy stance steady during the recent meeting of the Monetary Board as domestic inflation remains within the projected range and supportive of growth and domestic economic growth forecasts remain upbeat.

“The refusal so far of most Asian central banks to follow the Fed reflects underlying confidence about the resilience of their economies and financial systems against the shock of higher US interest rates,” the economists said.

The ADB urged emerging Asian economies, however, to monitor global liquidity conditions to mitigate the ill-effects of higher financing costs.

“Despite the region’s solid economic growth and fundamentals, its monetary authorities are well advised to monitor liquidity conditions, especially in sectors with high leverage and exchange rate exposure.