Fed and Decoupling? Asian Central Banks Continue to Hold Interest Rates Steady

China and Indonesia Hold Interest Rates Steady
Malaysia and Qatar Also Pause Hikes
Bank of Korea Expected to Join the Trend

Jerome Powell, Chairman of the Federal Reserve (Fed), is speaking at a discussion hosted by the nonprofit organization 'Washington DC Economic Club' on the 7th (local time).
[Image source=Yonhap News]

[Asia Economy Reporter Lee Ji-eun] As the U.S. central bank, the Federal Reserve (Fed), is expected to continue its interest rate hike policy, some countries have decided to keep their benchmark interest rates unchanged. This decision takes into account the impact of an economic recession, and such movements are also expected to influence the Financial Monetary Committee meeting of the Bank of Korea later this month.

On the 20th, the People's Bank of China, China's central bank, announced that the loan prime rate (LPR), China's real benchmark interest rate, was held steady for the sixth consecutive month at 3.65% for the one-year term and 4.30% for the five-year term. This move was made out of concern over the widening interest rate gap between the U.S. and China. The market predicts that the Fed will implement another big step (a 0.5 percentage point rate hike) in March, following January's consumer price index (CPI) exceeding market expectations and unexpectedly strong employment figures. If the People's Bank of China raises rates under these circumstances, the interest rate gap between the two countries would narrow, potentially causing foreign capital to exit China and the yuan to depreciate, leading to various side effects.

Indonesia also decided to refrain from tightening. On the 16th, Bank Indonesia (BI), the central bank of Indonesia, kept the 7-day reverse repurchase agreement (RRP) rate, used as the benchmark interest rate, unchanged at 5.75% after seven months. Indonesia's consumer price inflation peaked at 5.95% in September last year and has since gradually declined to 5.28% last month. BI explained that "inflation is easing faster than expected, so the current interest rate level is sufficient," and that this decision was made to support economic growth. Indonesia's economy grew by 5.31% last year, marking the highest growth rate since 2013 (5.56%). This year, growth is expected to be in the high 4% to 5% range.

Additionally, Malaysia and Qatar also decided to keep their interest rates unchanged. Malaysia halted rate hikes after its economy suffered significant damage due to the spread of COVID-19 variants and flooding. Qatar's central bank maintained its benchmark rate at 5.5% last month, stating that it aims to keep rates at an appropriate level for sustainable economic growth. Vietnam has not raised rates for four consecutive months since October last year.

Among the Group of Seven (G7) countries, Canada was the first to signal a pause in rate hikes. This decision was based on the assessment that rapid rate increases and tight monetary policy have led to reduced household spending and a slowdown in economic activity.

The Bank of Canada (BOC) raised rates by 0.25 percentage points last month and stated, "Inflation is expected to decline significantly this year," adding, "If economic conditions align with our projections, we expect to hold rates steady at the current level." Since July last year, Canada has gradually reduced the pace of rate hikes to moderate tightening.

The growing concern over a recession is cited as the main reason for central banks worldwide to adjust the pace of tightening. This reflects a different situation from the U.S., where there is even talk of a 'no landing' scenario, meaning a soft landing without a recession despite high-intensity tightening.

The market also predicts that the Bank of Korea will join the ranks of those keeping rates steady. Currently, Korea's benchmark interest rate stands at 3.50%, exceeding the mid-to-high 2% range considered the neutral rate for the Korean economy by market experts. The neutral rate refers to a balanced interest rate that neither causes high inflation nor deflation; when the benchmark rate surpasses this level, it indicates that the central bank is implementing strong tightening measures.

This content was produced with the assistance of AI translation services.