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Trade war

Asian central banks switch to easing as trade war drags on

Philippines follows Malaysia and New Zealand on rate cuts

The central bank of the Philippines, the Bangko Sentral ng Pilipinas, cut its benchmark rate for the first time in nearly seven years on Thursday.   © Reuters

MANILA/HONG KONG -- Central banks in the Asia-Pacific region are lowering interest rates to offer monetary stimulus as the U.S.-China trade war deepens economic uncertainty, with the Philippines becoming the latest nation to switch to easing mode.

The central bank of the Philippines, the Bangko Sentral ng Pilipinas, trimmed 25 basis points from its benchmark during a policy meeting Thursday, with the new rate of 4.5% set to take effect on Friday.

The Philippine interest rate cut comes immediately after similar reductions by Malaysia and New Zealand earlier this week. Asian central banks are shifting to easing mode after the U.S. Federal Reserve decided to pause rates hikes in January.

This is the first interest rate reduction in the Philippines in roughly six and a half years, marking a reversal of the central bank's hawkish trajectory. Last year alone, the bank hiked rates by 175 basis points over five sessions.

On Thursday, the government said gross domestic product rose 5.6% on the year during the first quarter ended March, falling short of the market projection of 6.1% growth and markedly slowing from the 6.3% gain in the October-December period.

The central bank chief, Governor Benjamin Diokno, previously served as the secretary of budget and management under President Rodrigo Duterte, before assuming his current position in March. As the budget secretary, Diokno supported Durerte's infrastructure development program, and it is apparent that he lowered the policy rate to prop up the economy.

On Tuesday, Malaysia lowered its key rate for the first time in three years, and New Zealand followed with a decrease on Wednesday, its first in two and a half years.

Analysts believe other countries will soon follow suit. Philip Lowe, governor of the Reserve Bank of Australia, released a statement Tuesday expressing concerns about the global economic outlook. "Growth in international trade has declined and investment intentions have softened in a number of countries," the central bank head wrote.

Australia will cut rates as soon as next month, predicts Shane Oliver, chief economist at AMP Capital in Sydney. Others predict Indonesia will shave basis points by the end of the year.

The freeze on rate hikes signaled by the U.S. is swaying those institutions. Higher U.S. policy rates strengthen the dollar, which creates downward pressure on the values of Asian currencies. With U.S. rate hikes on pause, the central banks in the region no longer need to keep rates high to defend their currencies.

Stable consumer prices are also making it easier for the Philippines to cut rates. India reduced rates in February and April -- moves that some observers say reflect the ruling government's intent to shore up the economy ahead of the general elections.

Yet the prospects of the U.S.-China trade talks collapsing are creating jitters on financial markets. Swiss lender Lombard Odier sees a 15% risk of the trade talks breaking down. If that happens, emerging market assets "would be under severe pressure," said the Geneva-based bank.

During Thursday trading, the Indonesian rupiah weakened to a four-month low, portending softer Asian currencies across the board. Indonesia, the Philippines and India are all posting budget deficits. Lower policy rates could trigger capital flight from those economies. And if oil prices climb due to tensions surrounding Iran, then inflation concerns would surface as well.

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