Asian financial markets took the US Federal Reserve Bank’s interest rate hike in stride, although Taiwan did end up cutting its interest rates.
The Fed on Wednesday raised US interest rates by 25 basis points, the first rate hike in almost a decade.
The nearly year-long anticipation of the rate hike had kept emerging markets on edge, especially over the past few weeks. The main fear is that investors will pulling capital out of their shaky economies and redirect it to safer US debt, now that it pays more.
Amid all the economic uncertainty in the world, most markets rallied in the wake of the hike, as anticipation of ripping off the band-aid is worse than the actual pain of removal,
“The Fed’s action brings an end to the lift-off uncertainty,” said Amando Tetangco, the governor of the Philippine central bank, which left interest rates on hold at a monetary policy meeting on Thursday, reported Reuters.
The one unexpected move came from Taiwan’s central bank, which cut its policy rate by 12.5 basis points, suggesting that worries about the region’s sluggish growth, not capital flight, are at the front of policymakers’ minds.
Hong Kong’s central bank was obliged to immediately match the Fed’s hike because of the city’s peg to the US dollar.
When the Fed first talked about cutting its bond purchases in mid 2013, Indonesia sparked a marked decline later called the “taper tantrum”, and this year its rupiah currency has been one of the region’s worst performers.
But regional currencies, including the rupiah rallied on Thursday. Indonesia’s President Joko Widodo welcomed the Fed’s decision “because there is certainty.”
Bank Indonesia kept interest rates unchanged on Thursday, as expected, but said it saw more room to lower them next year.
“The effect is positive for us–the stock index rose, the rupiah strengthened, the financial market reacted positively,” Widodo told reporters.
However, the US rate hike may pose problems for economies fueling their growth with debt.
“The Fed’s hike will stiffen the headwinds for growth in Asia,” Fred Neumann, HSBC’s chief Asia economist, told Reuters. “Rising funding costs, especially in highly indebted economies, will slow the leverage cycle on which regional demand has increasingly come to depend.”
And despite the Fed hike, most Asian central banks are getting ready to loosen monetary policy in an effort to boost growth in the region.
Barclays economist Wai Ho Leong expects monetary easing in the first half of next year to be led by India, China and probably also Indonesia and South Korea.
“No one is turning hawkish after the Fed has hiked,” he told Reuters. “Most central banks are dovish. This is to counter the effects of the trade recession, which hits Asia disproportionately harder than any other region in the world.”