Is Asia About To Enter A Wholesale Easing Period?

As soon as China’s inflation data for October was released, market chatter instantly switched to when the authorities would announce a policy shift to an easing bias. Inflation has been a burden for most Asian economies over the last 12 months, particularly from higher food prices, and when October’s data suggested a near-term peak was in place (CPI fell to 5.5 percent y/y from 6.1 percent the previous month while PPI fell more dramatically, 5.0 percent y/y from 6.5 percent, suggesting softer prices to come), the reason for a tighter stance became less acute.
 
Since the latest data, we have not heard any comments from Chinese officialdom about the need/option to ease its monetary stance. However, in late October Premier Wen did mention on a couple of occasions that policy will be adjusted “modestly” - the first mention of such a change in a number of months. While the argument for easing from an inflation outlook and deteriorating external situation perspective (and its impact on growth and unemployment) is gaining traction, there are still concerns about certain asset bubbles in the economy (on Wednesday a real estate developer warned that Shanghai property listings could be marked down as much as 20 percent) that are probably delaying the urgency of taking the first easing step.

Since the last easing cycle finished in December 2008, the People's Bank of China has delivered 1.25 percent of rates tightening and 6 percent of Reserve Ratio Requirement (RRR) tightening. In the same period, new Yuan loans have trended lower on an average monthly basis from an excessive peak of 1.9 tln Yuan to 470 bln in September 2011, with a rebound to 586.8 bln in October. Is this an indication that the PBOC feels lending has cooled enough and a new cycle is about to be embarked upon? Watch next month’s data for an extension of this trend. Meanwhile, the PBOC has been adding liquidity to local markets via open market operations resulting in lower short-term interest rates. Market consensus is that it will be the RRR that moves first and some local press is suggesting it may come as early as this month. We feel this has a high probability with a broader reduction in official rates kept in reserve until inflation is confirmed on a downward trend, more likely early 2012.
 
Elsewhere in Asia, Australia’s Reserve Bank of Australia delivered a 25 basis point rate cut at its November meeting, the first cut since April 2009 and following a series of seven hikes between September 2009 and November 2010. The minutes of the meeting showed that again easing inflation pressures were a major contributor to the decision and interest rate markets are now pricing in further cuts in the future (almost a certain 25bp at the next meeting and 150bp of cuts in the next 12 months).
 
Now it is the turn of the Reserve Bank of New Zealand to come under the spotlight. While the RBNZ constantly talks of “taking back” the emergency rate cut it announced after the March earthquake, interest rate markets have now erased any kind of tightening view for the RBNZ and are looking at a 25 percent chance of a 25bp cut at the next meeting on 8 December.