Asian CBs seen cutting key interest rates by 25-50 points

Asian central banks, including the Bangko Sentral ng Pilipinas, may slash key interest rates by 25 to 50 basis points this year to temper headwinds from the possible breakup of the eurozone, according to a research paper of Standard Chartered Bank.

In the research paper dated May 28, which assessed the impact of the possible exit of Greece, Stanchart said the amount of monetary easing would be limited if decisive measures were immediately put in place in Europe. The 25- to 50-basis-point cut assumed an orderly Greece exit.

“If European authorities fail to contain the fallout from Greece’s exit, leading to the exit of other EMU members, the economic and financial impact on emerging markets could be comparable to the 2008-2009 global financial crisis,” it added.

Should Asia face more severe recession risks from Europe, Stanchart said it was expecting Asian central banks to push policy rates back to historical lows posted during the 2008-2009 US financial crisis.

Certain countries—such as China, India and Indonesia—are also seen reducing reserve requirements to boost liquidity while some of the macro-prudential measures implemented during the 2010-11 recovery could also be relaxed, it said.

In its original forecast, Stanchart projected the BSP’s overnight borrowing rate to remain at the current level of 4 percent—already a historical low—up to the end of 2012.

In case of an orderly Greek exit, Stanchart sees the BSP slashing its key interest rates by 50 bps to a new low of 3.5 percent. Under its worst case scenario—where the contagion spreads to other states in the Eurozone—the bank expects the BSP to bring down the rates further to 3 percent.

Stanchart’s core scenario is that if Greece exits the eurozone, the contagion will be contained by the European Central Bank (ECB) through liquidity injections, which meant that any negative impact on emerging-market (EM) growth is likely to be limited and temporary. EM central banks and governments were also expected to take the necessary action to stimulate their economies.

Without the eurozone breakup risks, the British bank expects the Philippine economy to grow by 3.2 percent this year and by 5.3 percent next year.

In case of an orderly Greece exit, Philippine growth is seen to weaken to 2.7 percent this year and 4.4 percent next year. In case of a disorderly eurozone breakup, the growth is seen slowing further to 1.8 percent this year and 3.1 percent next year.

Stanchart said open economies in Asia such as Singapore, Hong Kong and Taiwan would be the most vulnerable to a slowdown in Europe via trade and financial linkages. Europe accounted for 11 percent of Asia’s total exports in 2011.

On inter-bank lending, the bank said regional and local banks should be able to partly fill the void left by European banks as they undertake significant de-leveraging or reduction in balance sheet.

In the currency market, Stanchart sees the Singapore dollar, Korean won, Chinese yuan and Indian rupee as the most vulnerable to a possible Greek default given their heavy positioning.

“The Thai baht and Philippine peso should be less affected given their much lighter positioning,” it said.