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Central Banks: Contrasts in Asia-Pacific

Reserve Bank of Australia: surprise inaction

Last week, the Reserve Bank of Australia surprised us by leaving the overnight cash rate (the official cash rate) unchanged at 4.25%. Most of us had anticipated a rate cut and, in fact, thought it was a shoo-in, given weak trends in retail sales, building approvals and employment. In the end, RBA chose to hold its fire. We could write a lot about the two-track Australian economy, its bank lending to real estate, its overvalued currency and the central bank’s inability to rein in the housing bubble, etc. But, by holding back on its rate cut, RBA demonstrated a certain prudence that is hard to find these days. No wonder investors love the Australian dollar no matter how egregiously overpriced the currency is. That said, considering the risks that the Australian economy faces this year, RBA might yet come to regret its prudence. Interestingly, they appeared to be doing that already on Friday when the central bank released its quarterly Statementof Monetary Policy. My weekly column in MINT on Tuesday examined Australia’s dual economy a bit closely.

Bank Indonesia: surprise and unwarranted rate cut

In contrast, despite cutting interest rates by 75 basis points in 2011, Indonesia chose to celebrate the release of moderately positive GDP growth numbers released earlier in the week (last week) by cutting rates another 25 basis points. This was as needless as it was surprising. One could be excused for thinking that the economy was tottering on the precipice of recession for a central bank to cut interest rates 100 basis points in a year. But, total outstanding loans of all banking institutions in Indonesia rose 25% in 2011. Annual growth rates in M1 and M2 are respectively 19% and 16%. Core inflation rate is 4.3%. One hears that the central bank is pushing banks to lend more and reduce rates too. The central bank is reportedly targeting growth of 27% in bank credit.

Indonesia is a good story in East Asia. It is a pity, then, that its institutions are not preparing for a more resilient and confident economic future in which economic growth consistent with prudent inflation and credit growth is pursued. With a good savings rate but possibly high incremental capital/output ratio, Indonesia needs to find ways to encourage investment and boost productivity. Superfluous rate cuts undermine both objectives. Lower compensation to savers eventually reduces the pool of capital available to investors.

More often than not, individuals never realize their potential because they are stuck in the past, unable to shed the baggage of history. It is as true of nations as it is of individuals.

No surprises from Bank of Korea – unchanged policy stance

Bank of Korea, expectedly, left interest rates unchanged at 3.25%. We had largely anticipated that but did not rule out a surprise rate cut. In the end, the Bank of Korea did not want to take chances on our abilities to handle too many surprises. It chose to leave rates unchanged. The statement accompanying the monetary policy decision was neutral to slightly positive on the economic outlook for the year, esp. in the second half of the year. It also did not take inflation developments for granted. That is prudent.

With the economic outlook in China uncertain and with Japan feeling the pressure of a stronger yen (TGS will have a separate post on the BoJ Monetary policy decisions taken on Tuesday), Korean policy rate of 3.25% appears positively high in a world where central banks take pride in withholding, until eternity, rewards for delayed gratification.

This post originally appeared at The Gold Standard and is posted with permission.

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