LET'S BE BOLD and say the latest 25-basis-point cut in United States' interest rates is the last in this cycle. There is only so much the Federal Reserve can do to help the economy revive and after that it is akin to pushing against a string. We shall not trouble ourselves with what it would mean for Hong Kong. Our short-term interest rates will follow their US equivalents like puppets on that string. The puppets went their own way for a period in 1997 and 1998 but this year, have been under full control of the puppeteer. However, what does it mean for the rest of Asia? The chart sets the 10-year history in perspective. The top line represents a weighted average of short-term interest rates in Asia ex-Japan (so big it swamps the sample) and China (no real history of true market rates). The bottom line shows the three-month London Interbank Offered Rate (Libor) for US dollars. Between mid-1993 and mid-1997, Asian economic inefficiency is reflected by an average interest-rate premium of about 400 basis points over Libor. It was made much greater by the financial crisis in 1997. Last year, it vanished as if in reaction to having been too great immediately before. Now it's back at about roughly the historical level - because US rates fell. Let us be bold once more and say the pre-1997 order of things is in operation again. This suggests we have now hit the bottom of the interest-rate cycle in Asia and that normal considerations apply. It may take some time before US rates go up again but, when they do, Asian central banks will face their usual conundrum. Should they move their rates up too or will they let their currencies weaken again? Odds are that they will let their currencies weaken at first but then interest rates will rise again. This is all still in the future, and is also a very general analysis of Asian trends. The table shows there is a good deal of variation from country to country but the ranking by average premium over US rates clearly gives you a good ranking of economic efficiency again. Indonesia is justifiably at the top of the inefficiency league, followed by the Philippines. Korea's premium at present is much less than its 10-year average but is unlikely to return to that average. Some degree of financial liberalisation has arrived in Seoul at last. At the bottom is Taiwan, whose short-term interest rates are still subject to a greater measure of official guidance than you might expect from one of the world's leading high-technology economies and officialdom wants low rates at present. Much the same applies to Singapore. And then we get Hong Kong. Once again, our interest rates are mandated by US rates but this does not necessarily say our position on the table is a false one. Other measures also say it is where we belong. Graphic: jake13gbz
