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Central banks
Opinion
Tai Hui
Tai Hui

Macroscope | Interest rate rises off the table as Asian economies try to curb speculation and asset prices

  • Since the US Federal Reserve is unlikely to raise policy rates soon, Asian central banks’ ability to take the lead in raising interest rates is limited
  • Instead, macroprudential policies that target credit growth and build buffers to protect the banking sector and borrowers can help prevent overheating

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The Bank of Korea displays damaged banknotes that were heated up in a microwave because of concerns over the coronavirus on July 31, 2020. Worries over inflows of hot money have led some central banks in Asia to retract policy support and enact measures to curb rising asset prices. Photo: AP
Tai Hui
The global Covid-19 pandemic has led to another round of ultra-loose monetary policy from central banks in developed economies, flooding the markets with cheap money. Although the global economy needs a lot of support to recover from the Covid-19 pandemic, there is a rising concern that a prolonged period of low interest rates could lead to asset inflation or excessive credit growth. 

Several Asian central banks – such as the People’s Bank of China (PBOC), the Bank of Korea and the Reserve Bank of New Zealand (RBNZ) – have voiced concerns about the rapid rise in asset prices. Some have even taken action to withdraw policy support.

Earlier this month, the PBOC took the unusual step of withdrawing 80 billion yuan (US$12 billion) from the banking system right before the Lunar New Year. The RBNZ tightened mortgage lending in its February meeting to cool down its property market.
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Since the US Federal Reserve is unlikely to raise policy rates in the next one or two years, Asian central banks’ ability to take the lead in raising interest rates is limited. High policy rates could limit lending growth and prevent Asia’s domestic economies from overheating.

At the same time, higher interest rates could also attract more international capital inflows into these markets when investors look to take advantage of the interest rate differential. Therefore, Asian central banks and governments will need to look for a different set of tools to attract this possible inflow of liquidity. 

02:22

What does an interest rate hike mean for Hong Kong homeowners?

What does an interest rate hike mean for Hong Kong homeowners?
Beyond raising interest rates, Asian central banks have some other tools for coping with the seemingly never-ending zero interest rate policy environment. After all, this is not a new problem for Asian monetary authorities.
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