By Mike Caggeso
With inflation slowing in Asia, governments are signaling they are open to cutting interest rates to buffer their economies from the global credit dearth.
A handful of Asian countries – Australia, China, Hong Kong, India, Japan, South Korea, Taiwan and Vietnam – all cut rates since last week. And among those, South Korea, Indonesia and Thailand reported slower inflation this week, Bloomberg reported.
The combination of both lower inflation and lower rates is starting to be priced into the interest rate swaps among the countries. And that could open the door to more rate cuts and the increase of money flows between these growing economies.
“Governments will continue to prioritize growth over inflation,” Sebastien Barbe, a Hong Kong-based strategist with France's Credit Agricole SA, told Bloomberg. “Swaps are already starting to price in some of the rate cuts with more to come.”
The most common interest rate swaps are when one party pays a fixed interest rate to the other. And over a set amount of time, the other party pays it back using a floating rate.
Interest rate swaps are often used as an institutional hedge or as a speculative play on changes in interest rates.
“The swap market is pricing in expectations about rate cuts and government measures to funnel funds into financial systems,” James Lee, an economist with JPMorgan Chase & Co. (JPM), told Bloomberg. “A thawing in money markets is causing a rally in short-end rates, leaving the door open to further declines in the swap rates.”
This at least shows that governments are finding a level at which they are gaining confidence about lending to each other.
The danger, however, is that governments get too comfortable with lending while they continue lowering interest rates. As we learned last year, drastically lowering interest rates weaken currencies and drive up inflation. And that played a large part in the throwing a wet blanket over Asian growth because demand for their exports waned around the world.
And that’s not including the fact that we’re still in the midst of the global financial rout that is widely expected to stall growth until next year.
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