Four Asian central banks held interest rates steady on Thursday, pausing in the fight against inflation while they assess how much their economies may suffer from a slowdown in U.S and European growth.
South Korea, Indonesia, the Philippines and Malaysia all kept benchmark borrowing rates unchanged and some economists predicted that officials may hold off on tightening through the end of the year if inflation abates in the coming months.
Central banks in Australia, Japan, Canada and Sweden all held rates steady at meetings this week, reflecting the growing caution globally over the health of the world economy. Price pressures intensified in South Korea and Indonesia in August, and South Korea acknowledged on Thursday it might miss its 2011 inflation target of 4 percent.
However, Europe's debt troubles and worries that the United States might slip back into a recession put Asia's policymakers in wait-and-see mode.
There is no difference of opinion among monetary policy committee members that we need to keep raising interest rates to achieve price stability, but I think it will be difficult to change interest rates if global uncertainty continues, Bank of Korea Governor Kim Choong-soo said.
Just two months ago, most economists expected the Korean central bank to keep tightening monetary policy to put a lid on inflation, which hit a three-year high of 5.3 percent in August. The benchmark interest rate of 3.25 percent is still 2 percentage points below the level before the financial crisis exploded in 2008, meaning BOK has a long way to go before borrowing costs are back to normal.
The BOK missed its chance and should have raised rates two months ago, said June Park, a senior economist with Meritz Securities.
Since then, the U.S. sovereign debt downgrade and a series of disappointing economic readings have deepened fears of another recession in the world's biggest economy.
Europe has struggled to convince investors that it has the political will to solve its government debt troubles. Indeed, a Reuters poll conducted after the BOK's latest policy decision showed most analysts think the central bank will not raise rates again this year given growing worries about the U.S. and European economies.
The European Central Bank and Bank of England are scheduled to meet on Thursday as well, and economists polled by Reuters expected them to hold rates steady too.
Bank Indonesia kept its benchmark borrowing rate unchanged at 6.75 percent, as expected, but adjusted its interbank lending rate, widening the band to 1.5 percentage points below the policy rate from 1 point previously. The widening would give banks the flexibility to adjust to wild swings in cash conditions and push market rates lower when required.
In some sense, to us it comes across as an implicit easing in policy, said Prakriti Sofat, an economist with Barclays Capital in Singapore. The central bank is definitely much more comfortable about its inflation outlook and inherently there is a growth bias, so I think the move is a reflection of those dynamics.
Bank Indonesia has held rates steady since a hike in February, making it far less aggressive than some of its Asian peers, even though it has struggled to keep inflation in check. Core inflation, which strips out some of the more volatile components, hit 5.15 percent in August, above the 5 percent mark that one central bank official has said would likely prompt a rate hike.
Many economists argue that August marked the peak for inflation because global commodity prices have cooled. Indonesia, however, has seen prices rise for an assortment of goods including gold, and it could take longer for those effects to fade away.
The central bank said a global slowdown may crimp Indonesia's growth, but should also help bring down inflation. In the Philippines, the central bank kept the overnight borrowing rate at 4.5 percent for a third straight month and expressed confidence that inflation was abating, giving it room for a prolonged pause. It lowered its 2011 and 2012 average inflation forecasts.
Malaysia, which kept its benchmark rate at 3 percent, drew a similar conclusion on inflation.
While inflation remains a concern, the increased uncertainties on the global and domestic economic growth prospects and their potential consequences could have a moderating impact on inflation, the central bank said.