Asia faces rate-cut pressure to curb fallout from virus

Bloomberg

Central banks in Asia face increasing calls to cut interest rates as they jump into action against a spiralling coronavirus crisis that’s hammering tourism, travel and confidence across the region.
The People’s Bank of China (PBOC) trimmed some interest rates and injected massive liquidity into the financial system to shore up slumping markets. Indonesia’s central bank said it was taking “bold” steps to bolster the nation’s currency and bonds. Bank of Japan Governor Haruhiko Kuroda said on Tuesday the bank won’t hesitate to take action to cope with the virus’s economic impact if it becomes necessary.
Asia — set to see the worst spillovers from the virus due to its dependence on Chinese demand and tourists — boasts a handful of central banks that have space to ease monetary policy in a world of rock-bottom interest rates.
Australia was first up, with the central bank keeping interest rates unchanged on Tuesday, saying “it is too early to determine how long-lasting the impact will be” on China’s economy from the virus outbreak. The Reserve Bank of Australia will continue to monitor developments and remains prepared to ease monetary policy if needed, it said.
Next up is Thailand, where there are growing calls for a move on Wednesday, but no consensus estimate so far that a cut is coming. By contrast, a reduction is expected on Thursday in the Philippines, which has reported the first death from the coronavirus outside China.
India — which on the weekend announced a budget that underwhelmed those hoping for more stimulus — also sets policy on Thursday. A recent spike in inflation is expected to keep the central bank sidelined, but some economists think it will have to act at coming meetings to spur a faltering economy.
Growth risks are accelerating as China enforces strict travel curbs and airlines around the world suspend service to the mainland. Bloomberg Economics estimates that even if the virus outbreak were severe but short-lived, China’s first-quarter GDP growth would hit a record low 4.5%. UBS Group AG’s China economist, Tao Wang, predicts a slump to 3.8%.
“The downside risks to growth have increased substantially in the short-term, especially for more tourism-oriented countries like Thailand,” said Priyanka Kishore, of Oxford Economics Ltd in Singapore.

Manufacturing Falters
Even before the virus spiral, manufacturing gauges signalled a shaky start to the year as the U.S.-China trade agreement failed to boost sentiment. South Korea’s purchasing managers index — a key barometer of global demand — fell to 49.8 in January from 50.1 in December.
In Thailand, restrictions on Chinese travel have hammered the tourism industry, which makes up about one-fifth of the economy. Growth was already taking a hit from drought and government spending delays, with the central bank last week signalling it may cut its 2.8% forecast for economic growth this year.
“The central bank needs to do something to help shore up confidence now,” said Burin Adulwattana, chief economist at Bangkok Bank Pcl. “We used to think the revenue stream from tourism will help drive the economy this year while other engines are weak. Now that engine is gone. One cut may not be enough this year depending on the severity of the pandemic.”
The Bank of Korea, which next meets on Feb. 27, has previously acted in response to a virus outbreak. In June 2015 it lowered rates during the MERS outbreak that ended up claiming the lives of more than 30 people in Korea. However, there was a combination of other economic factors favoring policy easing at the time.
Market Slump
Bank Indonesia, which cut interest rates four times last year, stepped up intervention in the bond and currency markets Monday to stem losses in the rupiah. Deputy Governor Dody Budi Waluyo said the bank is open to further policy action as it assesses the impact of the virus outbreak, and “future utilization of easing space will be carried out at the right timing.”
David Sumual, chief economist of PT Bank Central Asia in Jakarta, said if the situation worsens, “the government may opt to stimulate the economy via a more aggressive fiscal policy, since doubts remain over the efficacy of monetary easing amid tepid loan demand.”

In Singapore, which has confirmed 18 cases of coronavirus, authorities are bracing for an economic hit that may be worse than the SARS outbreak in 2003. The government has halted travel from China, where about 20% of the city-state’s international visitors come from. The Feb. 18 budget will likely provide support measures for industries like tourism and transport, and economists — including from JP Morgan Chase & Co. and Citigroup Inc. — see a higher risk that the Monetary Authority of Singapore will ease policy in April.

China’s yuan fix in focus after currency weakens
Bloomberg

A worsening virus outbreak is testing how much yuan weakness China can tolerate.
Traders are watching closely to see if the People’s Bank of China will set the currency’s daily reference rate on the weak or strong side of 7 per dollar on Tuesday. That’s after the yuan slumped past the key level Monday as onshore markets reopened for the first time since January 23.
Following the spot rate with a setting weaker than 7 would signal authorities’ concern over the wider economic impact of the coronavirus, according to Nathan Chow, an economist at DBS Bank Ltd in Hong Kong. But holding a line stronger than 7 would demonstrate an effort to stabilise sentiment, he said. The fixing is announced at 9:15 am Shanghai time and limits the onshore yuan’s moves to 2% in either direction.
“It’s not just the virus — the economy had already been slowing down since last year,” Chow said.
“There was a rebound in December but it proved to be short-lived.” It may take a few days for fixing to break 7 but it could happen within this week, he added.

The yuan’s drop Monday came despite the central bank setting its daily fixing at a stronger-than-expected level. China’s financial markets took a beating across almost every asset class as investors weighed the impact of the deadly disease that has killed at least 425 and infected thousands.
The currency held stronger than 7 from late December through January as trade tensions eased and China’s economy looked to be on steadier footing. The phase-one trade deal between the U.S. and China included a currency pact to avoid manipulation to gain an advantage.
Market watchers had recently revised yuan forecasts amid rising confidence that China had arrested an economic slowdown. Now, some economists are predicting the impact of the virus on China’s economy may be severe, and potentially larger than that of 2003’s SARS outbreak.
The daily fixing is calculated with formulas that take into account factors such as the previous trading day’s official close at 4:30 p.m, the yuan’s move against a basket of currencies and the moves in other major exchange rates.